By Emma Spielvogel

21 September 2017

It is imperative that mezzanine lenders and borrowers understand the risks associated with mezzanine debt.

Mezzanine finance assists real estate investors, developers, businesses and those looking to refinance to bridge the gap between senior debt and equity.

The word “mezzanine” comes from the Latin “medianus” which means “of the middle”. This is fitting as mezzanine finance is a middle layer of financing between senior debt and equity. It is a type of subordinated debt that ranks behind senior debt and ahead of equity in respect of priority of payment, and is generally secured by way of a second or third mortgage.

For example, consider a situation where a property developer requires significant funds for a new project. The developer has obtained a loan from a bank for 60% of funds secured by a first mortgage over the project site. While the developer is willing to contribute 10% out of his own pocket, there is a shortfall of 30%. The developer must tap into another source of funds – mezzanine finance. A mezzanine lender puts up the remaining 30% of money and takes out a second mortgage as security.

It is imperative that mezzanine lenders and borrowers understand the risks associated with mezzanine debt.

Mezzanine finance appeals to borrowers as it provides a much needed cash injection where they are unable to obtain additional senior debt finance because they have a high risk profile and/or are already highly geared. However, mezzanine financing will attract additional fees and higher rates of interest than conventional loans.

As a mezzanine lender, you are typically lending money in situations where mainstream lenders, such as banks, will not. Mezzanine lending is attractive as it offers high returns; however, it also carries more risk than other types of investment. If the borrower gets into financial difficulty, mezzanine finance is less likely to be repaid in full than senior debt.

At TLFC, we offer the following services for mezzanine lenders:

• Drafting and reviewing loan and security documents;
• Advising on your security position and the type of security;
• Conducting general due diligence;
• Advising on and/or drafting deeds of priority and other related agreements with senior financiers; and
• Acting on behalf of mezzanine lenders in the event of default by the borrower.

Whether you are a mezzanine lender or borrower it is essential that you seek legal advice in respect of your proposed transaction.

For further information and advice on mezzanine finance, please contact our Commercial Team.

Related Articles

View All
Commercial Contracts & Agreements / Leasing & Lease Disputes / Small to Medium Enterprises

Retail Lease Disputes: what happens when tenants default

Choosing the right tenant is critical A prudent commercial landlord will review a prospective tenant’s financial...
Read More
Business Law / Commercial Contracts & Agreements / Franchising & Licensing

Uncertainty: Does your franchise agreement have an enforceable option or an agreement to agree?

Kiraig concerned a master franchisee Its rights to renew for a further term were typical in the franchising space They...
Read More
Australia-Israel Legal Advice / Charities & Not-for-Profit / Technology and Start Ups

TLFC – Award Finalist for Law Firm of the Year (Medium Category)

Tisher Liner FC are proud to be nominated as an award finalist in the 14th annual Victorian Legal Awards Medium Law...
Read More
Business Law / Commercial Contracts & Agreements / Small to Medium Enterprises

Insolvent Parties – Be Careful of Terminating Contracts

From 1 July 2018 (or earlier if the date is moved forward), the Treasury Laws Amendment (2017 Enterprise Incentives No...
Read More
Business Law / Commercial Contracts & Agreements / Intellectual Property

It Won’t Happen To Us! We Know Each Other – We Don’t Need an Agreement

The material considerations relevant to your interest, whether it be a property development, joint venture,...
Read More
Business Law / Commercial Contracts & Agreements

Have you Executed and Dated the Documents Correctly?

How significant is it when parties you think have executed documents correctly haven’t It is vital that your...
Read More
Business Law / Commercial Contracts & Agreements / Litigation & Dispute Resolution

Corporate Divorce – The Importance of Prompt Damage Control

When good companies fail due to deteriorating business relationships, there is often a cast of familiar players: 1 The...
Read More
Business Law / Commercial Contracts & Agreements

Important Contractual Clauses: Things You Must Consider Carefully

The following are some items to consider when you review a contract: Term: Outlines the duration of the contract It’s...
Read More
Retail Clients & Chains / Developments / Real Estate Agents

How Reasonable Must I be? A Guide for Landlords

An assignment/transfer of lease generally occurs in the following scenarios: When the tenant grows out of its premises...
Read More
Litigation & Dispute Resolution / Commercial Contracts & Agreements / Business Law

Handshake Agreements and the 100 million dollar bar coaster – Why it pays to speak to a litigator

In 2006 our firm successfully enforced an agreement between shareholders in an unlisted company based on nothing more...
Read More
Property & Development / Commercial Contracts & Agreements

Before you sign a Contract of Sale.

Is the property correctly described in the contract of sale and in accordance with the title (a copy of which should be...
Read More