Mezzanine loans are loans that are often used by used by developers to secure additional or supplementary financing for a development project. This would be an additional loan that is over and above the agreed loan that has been agreed to fund the project. So for example if a bank has agreed to offer 70% of a development project, a developer make seek a mezzanine loan for an additional 20% which would reduce his equity contribution. These kinds of loans may be secured against the stock of the development company or against the property themselves. If the loan is secured against the stock of the company it allows for a more rapid seizure of the underlying collateral in the event of foreclosure or default. Stock which is a personal asset of the borrower can be seized in a legal process taking as little as a few months while the foreclosure process can take as long as a year.
The lenders will often want a higher interest rate to compensate them for taking part of the risk that would normally be covered buy the equity capital. The compensation may be in the form of a higher interest rate or or it could include a share of profits of the development. This type of loan is called mezzanine finance because it is an intermediate level between debt and equity.