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Mezzanine debt (also called subordinate debt) is a structured financing product used to increase leverage. It is generally higher risk than senior debt, and therefore demands higher returns.
Mezzanine debt can be secured by a second trust deed, and is therefore subordinate to the senior mortgage, but primes any equity. Mezzanine loans may also be secured by a pledge of partnership interest in the ownership entity. Unsecured mezzanine is treated as preferred equity.
Mezzanine financing is limited by ratios based on the combined senior and subordinate debt. The most important of which include loan principal to property value (LTV), and annual net operating income to annual debt service (DSCR). Subordinate lenders accept some minimal risk to their principal balance, and may be willing to accrue some portion of their interest payments.
The flavors and sources of mezzanine debt are myriad. Designing structured financing is an art form that takes many years of financing experience and access to a multitude of sources. Capital Funding Corp is adept at arranging financing to accommodate unusual needs and higher leverage structures. We have become known for this type of “financial engineering”.
For more information on mezzanine debt sources, including Banks, Life Companies, Pension and Endowment Funds, Private Equity and Hedge Funds, and REITs, please see the links on the right side of this page.
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