Mezzanine Lenders Key Terms

Start your career as a mezzanine lender with knowledge of these key terms

Mezzanine lenders help business owners make up the difference when they cannot afford the down payment on a loan. Those that are just getting started in the industry may find that there are a number of new terms that they are not familiar with. It's important to know whether the loan you are giving is senior or subordinated debt or whether you will have profit participation or an exit fee. Take the time to learn some of these common terms before you get started.

 

Investment property

Mezzanine lenders do not want to work with residential properties. Instead, they are looking for an investment property. An investment property is a property that generates an income, such as an apartment building or commercial office space. By only offering mezzanine loans to these types of properties, the lender is hoping that the borrower is less likely to default on the loan.
Try: MSN Money discusses how to find a good investment property.

High LTV mortgage

A high loan-to-value mortgage, also known as a high LTV or HLTV, is a mortgage where the amount of the mortgage is high when compared to the value of the property, in some cases even exceeding the value of the property. Mortgage lenders typically want to loan 80 percent or less of the value of the property. Mezzanine lenders primarily deal with high LTV mortgages.
Try: Real-Estate-Owner.com discusses high LTV mortgages.

Senior debt vs. subordinated debt

When an individual has two or more loans, one of them is the senior debt and the others will be the subordinated debt. The senior debt takes preference in payment, should there be a default and liquidation of assets. Mezzanine loans are usually senior debt.
Try: Private Equity Info Blog describes the difference between senior debt and subordinated debt.

Profit participation vs. exit fee

Profit participation and an exit fee are two ways that mezzanine lenders make their money. With profit participation, they receive a portion of the business' profits. With an exit fee, the business pays a high fee at the end of the loan.
Try: Learn whether profit participation or an exit fee is the better deal at Retail Traffic. This issue is discussed about halfway into the article.

Preferred equity

Preferred equity is a type of mezzanine loan, where the lender makes an investment into the business to receive preferred equity.
Try: Visit the C-Loans Blog to learn more about preferred equity.

Commercial construction loan

A commercial construction loan is a loan for the construction aspect of a property's renovation. Most traditional lenders will not agree to this type of loan because it exceeds the value of the property. Mezzanine lenders frequently work with those that have a commercial construction loan.
Try: Business Money Australia talks about commercial construction loans.

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