Source: Forbes —
Commercial real estate financing structures often include not only mortgage loans but also mezzanine loans. These latter loans are secured by pledges of ownership interests in the mortgage borrower. If the mezzanine loan defaults, the mezzanine lender can foreclose on the ownership interests in the mortgage borrower. Through that foreclosure, the mezzanine lender, or sometimes a third party, will acquire ownership of the mortgage borrower, keeping the mortgage in place. The new owner of the mortgage borrower will need to deal with the mortgage. Mezzanine loans bear interest rates higher than mortgage loans because they entail more risk.
Mezzanine loans are, however, full of surprises. Here’s one that many people in the business haven’t considered.
After a mezzanine loan foreclosure, the new owner of the mortgage borrower gains legal control of everything the mortgage borrower owns. Although the mortgage borrower’s real estate is the main event, the mortgage borrower also owns all its past communications, including any with its attorneys.