Mezzanine Financing

Category: finance

A hybrid of debt and equity financing that gives the lender the right to convert to an equity interest in the company in case of default.

Mezz financing is the "bridge money." If a developer has 20% equity and the bank provides a 60% mortgage, they still need 20%. The mezz lender provides that gap at a very high interest rate, secured not by the property itself, but by a pledge of the developer’s equity in the LLC.

Common Examples

• To avoid bringing on another equity partner, the developer utilized mezzanine financing to cover the final $5M of construction costs.
• Mezzanine lenders charge high interest rates because they are in the "second position" behind the primary bank if the project goes bankrupt.