Mezzanine Financing: Best Financing in the House or Overpriced Bleacher Seats?

Fourth Quarter , 2010

Gone are the days of walking into a bank and signing your name for an unlimited amount of money. Despite the assurances from Washington that banks should lend to small businesses, the truth of the matter is that government regulators are virtually stopping any financing flow to the consumer. The pendulum for financing has swung back the other way, as the process for obtaining financing has become longer and more difficult to achieve. Given this difficult lending environment, alternatives to traditional financing have risen to the forefront, one of which is the concept of Mezzanine Financing.

Mezzanine Financing is a hybrid of debt and equity financing, which, although several types of Mezzanine Financing exist, essentially provides a lender with debt equity rights that convert to an ownership or equity interest in the borrowing company if the loan is not paid back in time and in full. While in a typical mortgage loan, a lender may require 25-30% owner equity to finance a transaction, Mezzanine Financing allows a borrower to use its equity to obtain money without giving up any of its ownership. The collateral for the loan is typically the shares or membership interest in the company which convert to an ownership interest in the company in the event of a default. One should be particularly cognizant of the relationship between the mortgage lender and the mezzanine lender, as there are several pitfalls to avoid and to be aware of. As one might guess, this type of financing is, by its very nature, riskier, which in turn requires a higher rate of return for the lender. However, it can be a great tool for a borrower to utilize in this credit crunch and at the same time allows the borrower to maintain full control over the company.

They say necessity is the mother of invention and the credit crunch has created a variety of tools being used by consumers in obtaining money and closing deals such as owner financing, wrap-around mortgages, lease option to purchase and Mezzanine Financing.

As we represent a variety of lenders and borrowers, we are attuned to the latest methods of financing and structure of transactions in a challenging environment.