1. What is Mezzanine or Intermedia financing?
Mezzanine financing or «Intermediary Debt» is a relatively little-known hybrid financing instrument that occupies an intermediate position between senior preferred debt and equity. It provides additional liquidity to projects or acquisitions when traditional bank financing does not cover the full capital need and the promoter does not want to dilute their stake by selling equity.
- Nature: A hybrid between debt and equity.
- Objective: complement the funding without giving up control of the shares.
- Regular users: real estate developers, leveraged buyers, expanding companies.
2. How it fits into the capital structure
Capital stack
Last position in terms of payment; owner of the controlling stake; highest potential return.
Debt subordinate to the senior debt; higher cost; may include conversion clauses or participations.
Priority of collection; lower cost; real guarantees.
Practical example
- The promoter provides 10% of the equity.
- Banco provides 60% as a senior loan.
- Prestamista mezzanine provides 30% to complete the financing. At the end, the intention is to sell or refinance the mezzanine-financed portion with a cheaper bank loan.
3. Common instruments and structures
- Pure mezzanine loan: Fixed or variable interest; without real guarantees on priority assets.
- Hybrid convertible loan: Debt with the option of becoming a share if it is not paid.
- Warrants or equity kicker: rights over a portion of the capital as compensation for greater risk.
- Subordinate notes: documents that collect the subordination against the senior debt.
- Preferred equity: an economy similar to the mezzanine but legally treated as preferred equity.
Common economic and legal terms
- Cost: higher than the senior debt; includes interest and, often, a variable or participative component.
- Loan term: In the medium term, typically 2 to 7 years depending on the project and the planned exit date.
- Amortization: It can be a bullet payment at maturity or with intermediate payments; it is often structured to be paid after the sale or refinancing.
- Guarantees: usually non-mortgage liens on the principal asset; instead, guarantees on corporate shares or contractual rights.
- Subordination: clause that defines that the mezzanine is charged after the Senior Preferred Debt.
- Covenants: financial and operational restrictions designed to protect the lender.
- Conversion events: conditions under which debt can be converted into capital.
4. Advantages and disadvantages for promoters and investors
✔ Advantages for promoters
- It is the Best Option for Expanding Companies.
- It allows for the execution of larger projects without having to cede significant equity.
- Speed and flexibility compared to traditional banking processes.
- Maintenance of operational and strategic control.
- It is a Hybrid between Debts and Shares.
✔ Advantages for mezzanine investors
- Higher returns than senior debt.
- Possibility of upside through warrants or conversion.
✘ Disadvantages and costs
- Higher financial cost that reduces the margin if the project does not have sufficient profitability.
- High risk due to being subordinate in the payment order.
- It requires legal agreements and complex structures that generate advisory costs.
5. Companies that use Mezzanine Loans or Intermediate Debt in Crowdfunding/Crowdlending
🟠 Devon
Click here 👉 YouTube course about DEVON →
🟩 Asterra Estate
Click here 👉 YouTube course about ASTERRA ESTATE →
6. Risks and how to mitigate them
- Construction or execution risk: rigorous schedule and cost control; drawdown clauses subject to milestones.
- Market risk: demand and price sensitivity tests; conservative scenarios.
- Risk of refinancing: Ensure that banks have letters of intent for refinancing or have an alternative exit plan in place.
- Legal and fiscal risk: Robust documentation and prior tax analysis.
- Liquidity risk: structure amortization and covenants that allow flexibility in critical periods.
7. Typical process of a mezzanine operation
8. Due diligence checklist
- Title and charges on the land.
- Project status and permits.
- Budgets and contingency provisions.
- Construction contracts and subcontractors.
- Sales projections and price sensitivity.
- Exit plan and evidence of access to refinancing.
- Corporate structure and execution risk by the sponsor.
- Relevant tax and labor issues.
- Alignment between the conditions of senior debt and those of mezzanine debt.
9. Negotiation and terms to prioritize
- Subrogation clause and clear order of priority.
- Limitations to excessive covenants that prevent the project from operating.
- Defined exit mechanisms: deadlines for refinancing or sale, valuation for conversion.
- Protections against defaults provided but not destructive to the promoter.
- Flexible interest structure: fixed combination plus participatory if appropriate.
10. Legal and fiscal aspects to consider in Spain and Europe
- Review the tax treatment of interest and any participatory component.
- Analyze regulations regarding subordination and guarantees in the country of the asset.
- Ensure that the conversion of debt into capital meets corporate and tax requirements.
- Study the implications of VAT, IAE and other taxes applicable to the real estate project.
11. Frequently asked questions
Does the mezzanine require giving up control?
Not necessarily; it can be combined with limited warrants or conditional conversion.
Is it suitable for small projects?
It depends on the relative cost; it usually fits better into medium and large-scale projects.
What do mezzanine lenders look for?
Legal certainty regarding subordination, clarity in the exit plan, and profitability commensurate with the risk.
How is the expected return calibrated?
The total cost of capital and the profitability of the project are compared under conservative scenarios.
12. Essential glossary
- Capital stack: order of priority among sources of capital.
- Senior debt: Principal debt with priority of collection.
- Equity kicker: a mechanism that delivers additional participation to the lender.
- Subordination: The payment order places the mezzanine below the senior debt.
- Bullet: Single payment at maturity.
13. Conclusion and next steps
Mezzanine financing is a powerful tool for scaling projects without giving up control, but it requires financial discipline, robust legal documentation, and a robust exit plan. To implement it successfully, it requires aligning interests between the promoter, senior lenders, and mezzanine investors, and preparing the transaction with rigorous due diligence.
Community and resources
In the Telegram community of InvantAPPs We share our real-world experiences by investing in crowdlending platforms, we keep up to date with changes in regulation and taxation, and we resolve day-to-day questions among investors.
If you are taking your first steps or want to test your analysis before moving your capital, we are waiting for you in the group.
Join the Telegram group →
