Legal Risks in Bridge and Mezzanine Lending—and How to Protect Against Them
Bridge and mezzanine loans have become essential financing tools for real estate investors and developers looking to close gaps, unlock equity, or move quickly on time-sensitive deals. Their flexibility is a major advantage, but that speed and creativity often come with increased legal complexity and risk. Unlike traditional bank loans, these structures can involve multiple layers of debt, intercreditor agreements, equity pledges, and short timelines—all of which require careful legal attention to avoid costly missteps.
One of the biggest legal risks in bridge and mezzanine lending is structural ambiguity. When senior and mezzanine lenders are not aligned on rights and remedies, especially during a default, it can lead to litigation, foreclosure delays, or value loss. Key documents such as intercreditor agreements and UCC foreclosure notices must be tightly drafted and negotiated to define each party’s rights clearly. In mezzanine loans, where the collateral is often an equity interest in the borrowing entity rather than the real estate itself, precision in documentation and strict compliance with Article 9 of the UCC are critical.
Another common pitfall is failing to vet sponsor strength, entity control, and compliance with organizational documents. Legal counsel should carefully review the borrowing structure, confirm authority, and identify any approval or consent rights that could slow down enforcement later. Bridge and mezzanine lenders also need to be aware of local foreclosure laws, lender licensing requirements, and potential usury concerns. These issues are especially important when lending across jurisdictions or to foreign entities, where subtle differences in state or international law can have an outsized impact.
Structuring bridge and mezzanine transactions with an eye toward long-term protection and fast enforcement is key for the lender representation. This includes identify and mitigate risks upfront, draft clear and enforceable agreements, and guide our clients through both origination and default scenarios. In a lending environment where speed matters and every deal is custom, the legal side cannot be an afterthought. Whether you’re funding a value-add acquisition, recapitalizing a project, or lending against a preferred equity position, having experienced counsel at the table can make the difference between a profitable deal and a legal headache.
