Mezzanine financing is a hybrid of debt and equity financing that gives the lender the right to convert to an equity interest in the company in case of default, generally, after venture capital companies and other senior lenders are paid.
Reasons for Using Mezzanine Debt
There are two main reasons why borrowers would look to include mezzanine debt as part of the capital required for the financing of a property. The first is to boost equity returns. Theoretically, the less equity a borrower uses for a property, the higher their returns will be (there are many caveats and formulas that determine what amount of leverage is appropriate to maximize equity returns. The second is to bridge the gap between the amount of equity that’s needed and the amount of equity that’s available.