Once a Mortgage, Always a Mortgage - The Use (and Misuse) of Mezzanine Loans and Preferred Equity Investments

Abstract:     
The mortgage remains one of the most common and successful techniques to finance real estate transactions. In the last 25 years, mortgage loans have also been sold in the secondary market and included in mortgage-backed securitizations. The amazing growth of mortgage securitizations has also led to the development of novel financing techniques, including mezzanine financing and preferred equity investments.

This article discusses the historical development of real estate financing from the early beginning of mortgage law and the equity of redemption through the modern advent of mortgage-backed securitizations (MBS) and other non-traditional financings. It argues that the phenomenal success of real estate securitizations along with the growth and power of the national credit rating agencies gave birth to two new popular non-traditional financing techniques - mezzanine loans and preferred equity investments.

Employing a detailed explanation of the legal structure and basic underpinnings of mezzanine loans and preferred equity investments, this article argues that lawyers carefully structure mezzanine loans and preferred equity investments to avoid many of the borrower protections associated with junior mortgages, and that these new financing techniques are simply modern day mortgage substitutes. The article concludes that courts should apply traditional property law and recharacterize these financings, thereby treating junior mortgages, mezzanine loans, and preferred equity financings similarly.

Number of Pages in PDF File: 53

Keywords: real estate, mortgage, mezzanine financing, mortgage-backed securitizations

Accepted Paper Series