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You wrote, I have a rudimentary understanding of mezzanine financing (I don't know details about when balloon payment is due or anything like that). But I can't figure out why even a high risk lender would provide that much financing for a property that was theoretically worth $3.5 million (in reality, I'm guessing $2 million max). Might this be secured by multiple properties (though I can't for the life of me figure out what else this developer owns that could be used as collateral)? I'm guessing the developer wanted a lot more capital than needed to pay off the original loan (I doubt even with delinquent interest more than $5 million), because we're talking less than zero cash flow (and needless to say suspicions of where the cash flow is ending up).

My understanding of Mezzanine financing is that the lender tends to loan you money at a high interest rate for a limited period with an option on [a stake in] your business. Should you fail to meet the terms of the lender or should the lender choose to exercise his option, the Mezzanine financing effectively allows the lender to come take over your business and liquidate it to satisfy the debt.

In this case, the builder probably had to put up his business as the collateral.

In 2008 I worked for a high tech startup that collapsed. After meeting payroll on September 31st, 2008, they could no longer meet the terms of their Mezzanine financing and were forced to shut down and turn over the business to the lender for liquidation.

- Joel
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