With Troubled Offices, Mezzanine Debt Takes Center Stage

Executive chair of Herrick and co-chair of the Real Estate Department, Belinda Schwartz, was quoted by Law360 Real Estate Authority discussing the state of the market with real estate finance and mezzanine debt. In commercial real estate, mezzanine debt bridges the gap between the first mortgage, which is the first to be repaid and carries the least risk, and equity, which is the last to be repaid but offers the greatest potential payoff. Mezzanine debt typically has a shorter term, a higher interest rate, and special remedies the lender can seek if the borrower defaults. Mezzanine debt can help fill the funding gap left by bank lenders.

The article notes, "[A] big change in mezzanine finance terms from pre-2020 is that loan terms are much shorter. Two or three years ago, a four- or five-year term was common, while today it's more like two to three years. The mezzanine deals originated in today's environment could play out much more quickly, and if borrowers are unable or unwilling to pay, that could result in even more mezzanine foreclosures."

"I think it will accelerate," said Belinda. "While you turn through a cycle, there are unfortunately some deals that just don't work as underwritten. If you don't think it's wise to, or you can't put more money into it, you might end up with a foreclosure."

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