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Transcript: What is mezzanine finance?

Let’s just talk about the pecking order of debt. A senior
investor is simply someone who is first in the pecking order to get repaid. For
example, a mortgage lender is the most senior investor because, before anything
else happens with the property, the mortgage-holder is first in the queue. A
shareholder in a company is the most junior investor because they get paid last
after all the creditors have been settled. It’s that simple.

Mezzanine usually means something in between a senior debt
holder and a shareholder who has equity. In my experience, it usually means a
shareholder has gotten a loan but can’t come up with the full contribution that
they are expected to put in themselves. No lender will, and should, lend
someone 100% of the money for a venture. You should always have some skin in
the game. So, let’s just say you get a loan for a building and the bank gives
you 70%, you’ve got 10%, and now you turn to a mezzanine loan to get the other
20%. That loan usually comes at a high price; in my experience about two times prime,
and because it makes up only 20% of the total debt, my clients can afford it,
but it’s risky of course.

I made a living chasing mezzanine deals for a few years
because it’s an easy way to make a decent return with a relatively small amount
of capital.