How is a mezzanine loan different from a second mortgage?

A second mortgage is secured by a lien on the real property (just like the first mortgage, but subordinate in priority). A mezzanine loan is secured by a pledge of the equity interests in the entity that owns the property, not a real property lien. This distinction determines the remedy: second mortgages are foreclosed through state real property foreclosure law (often taking 12-24 months); mezzanine loans are foreclosed through UCC Article 9 (often achievable in 30-45 days).

Can I buy a mezzanine loan and then immediately sell the underlying property?

Not immediately, you first need to complete the UCC foreclosure to gain ownership of the equity, then you control the sale of the real property. The UCC foreclosure itself takes 30-60 days at minimum. Once you control the equity, you can sell the property subject to paying off the senior mortgage at closing. The speed advantage of mezzanine-to-ownership versus traditional mortgage-to-REO is typically 6-18 months.

What is the "pledge" in a mezzanine loan and how is it documented?

The pledge is the borrower's assignment of their membership interests (LLC ownership stakes) to the mezzanine lender as collateral for the loan. It is documented through a Pledge and Security Agreement and a UCC-1 Financing Statement filed in the state where the borrowing entity is organized. The UCC-1 filing perfects the mezzanine lender's security interest in the pledged equity, making it enforceable against third parties, including a bankruptcy trustee.

What happens to the senior mortgage when I complete a UCC foreclosure on a mezzanine position?

The senior mortgage stays in place, it runs with the real property, not with the equity. After your UCC foreclosure, you control the entity that owns the property (and is obligated on the senior mortgage). You become the new equity owner subject to the existing senior debt. If the senior mortgage is performing, you continue making debt service payments. If the senior mortgage is also in default, you face the choice of curing the default or exercising your purchase option under the intercreditor agreement.

What does it cost to execute a UCC foreclosure on a commercial real estate mezzanine loan?

Legal fees for a straightforward, uncontested UCC foreclosure: $25,000-75,000 depending on complexity and market. For a contested UCC foreclosure where the borrower litigates: $100,000-300,000 or more in legal costs, and a 6-18 month timeline. Notice publication costs, process server fees, and UCC sale administration add $5,000-15,000. Include all these costs in your mezzanine acquisition underwriting.

How to Buy a Commercial Real Estate Mezzanine