obligations, burden, debt

What Happens If You Default on a Mezzanine Loan?

Unlike senior debt, mezzanine loans are not directly collateralized by the underlying real estate. Instead, it is secured by a pledge of the mezzanine borrower’s ownership interest in the property owner, which is the entity that owns the underlying real estate. If a borrower defaults, the mezzanine lender can foreclose on the pledged ownership interest and become the new owner of the entity that owns the real estate. Defaulting on a mezzanine loan has significant implications for both borrowers and lenders.

Second mortgage as an option

Is Mezzanine Financing a Second Mortgage?

While mezzanine financing seems similar to second mortgages, it operates differently and is secured by the stock of the owning corporation. Mezzanine financing is not a second mortgage in the traditional sense. Its position in the capital stack make it a distinct form of real estate financing. Due to the potential risks involved, mezzanine loans are typically placed behind a first mortgage, ensuring the protection of the property owner’s equity.

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