In many lending situations, there is simply a borrower and a mortgage lender, but in some situations a mid-level lender can be included to help fortify the financial power for greater flexibility. In such cases, an agreement must be struck not only with the borrower, but also between the primary lender and the entity providing mezzanine financing, or the secondary party.
The agreement used to stipulate methods of communication between the two lenders and procedure should the borrower default on the loan is known as an intercreditor agreement. Sometimes, conduit lenders will not agree to signing an intercreditor agreement with a mezzanine provider, but other times they will understand the ways in which mezzanine financing can strengthen the buying power of the borrower and the return on investment for all. In such cases, both creditors must come to terms that will be included in the primary mechanism of their agreement.
Most often intercreditor agreements allow for the mezzanine provider to be immediately informed in the event that the borrower defaults on the loan and given first prerogative at remedying the default. In such cases, the mezzanine lender will take over the property, rather than the mortgage lender foreclosing on the property for complete seizure. In some cases, the mezzanine lender will be allowed to foreclose on the property, but this stipulation is rarely accepted by the mortgage lender as it can lead to lack of confidence from both current renters and those who might be interested in renting in the future.
The structure of mezzanine financing loans can be complex as they are designed to severely limit the ability of a borrow to declare bankruptcy or default on a loan. In many cases, a special entity holding company will be established to ensure that the mezzanine provider’s interests in the underlying property is 100% guaranteed. To that end, the holding company is mechanized with numerous covenants and stipulations that control how all parties, especially the borrower, behave.
Anyone hoping to strengthen their purchase power and cash flow by entering into a mezzanine financing agreement should learn as much as they can about the structure as it is subject to a wide variety of rules and regulations. Even with the added concerns of specific contract stipulations and increased participants, such financing plays a consistent role in the successful funding of numerous companies. Those who are must successful at applying this financing method will be those who are aware of both their legal protections and obligations within the agreement.