Mezzanine Capital: A Comprehensive Guide to Its Legal Definition
Definition & Meaning
Mezzanine capital is a type of financing that combines elements of debt and equity. It typically takes the form of subordinated debt, meaning it ranks below senior debt in claims on a company's assets. Mezzanine capital is often used by companies during leveraged buyouts to help finance the acquisition of another company. This financing method is generally more expensive than secured or senior debt due to the higher risk involved for lenders. In real estate, developers may use mezzanine loans to obtain additional funding for projects when the primary mortgage does not cover all costs.
Legal Use & context
Mezzanine capital is commonly utilized in corporate finance and real estate transactions. It is particularly relevant in:
- Leveraged buyouts, where it helps finance the purchase price of an acquired company.
- Real estate development, providing additional funding when primary loans do not meet project needs.
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Real-world examples
Here are a couple of examples of abatement:
Example 1: A private equity firm acquires a manufacturing company for $50 million. They use $30 million in senior debt and $10 million in mezzanine capital to finance the deal, with the remaining $10 million coming from equity investments.
Example 2: A real estate developer wants to build a new apartment complex. They secure a primary mortgage for $1 million but need an additional $300,000 to cover construction costs. They obtain a mezzanine loan to fill this gap. (hypothetical example)