A loan secured by the borrower's equity interests in the property owner rather than by the real estate itself, sitting behind the mortgage and ahead of common equity.
The longer version
A mezzanine lender does not take a mortgage. It takes a pledge of the membership or partnership interests in the entity that owns the property, which is why a mezzanine default is enforced through a UCC foreclosure on those interests rather than through a real estate foreclosure. That structural difference is the reason the closing runs on a separate set of documents and a separate collateral file.
The two loans close together and the relationship between them is governed by an intercreditor agreement, which sets cure rights, standstill periods, and what the mezzanine lender may do if the senior loan goes into default. On the closing checklist the mezzanine items sit in their own category because the parties, the counsel, and the deliverables differ from the mortgage side.
Common questions
- How is a mezzanine loan different from a second mortgage?
- A second mortgage is secured by the property and is enforced by foreclosing on the real estate. A mezzanine loan is secured by a pledge of the equity interests in the property owner and is enforced through a UCC sale of those interests, which is usually faster than a real estate foreclosure.
- Why does a mezzanine loan need an intercreditor agreement?
- Because two lenders have claims on the same asset through different collateral. The intercreditor agreement sets who may act first, how long the mezzanine lender must stand still after a senior default, and what cure rights each side holds.
- Do both loans close at the same time?
- Usually yes. The senior and mezzanine closings are coordinated so the intercreditor agreement, the pledge, and the mortgage all become effective together, which is why the closing checklist tracks them as parallel tracks with a shared funding date.