Who owns equity in Mezzanine financing if there's no default.

[Shafi Noss]

Hi everyone, I'm trying to get a sharper picture of how the different types of debt and equity fit together in a capital stack. 

In Mezzanine debt, the the lender is paid back like a normal loan, or if the borrower defaults the lender can exercise a call option (or warrant?) to convert the remaining debt into equity. 

I have a couple of questions about this. Who owns the equity during payback? For example if that portion of the equity earned $1000 in cashflow, who would that be paid to? 

I'm guessing a mezzanine loan is in second position to a bank loan, so if the borrower defaults the bank can claim the entire property, that means if there is a failure, the mezzanine lender gets nothing. If that's true, the only time the mezzanine lender would be able to exercise its option is if the borrower was only unable to pay for the mezzanine debt but could continue to support the first position bank debt. How common is that? And doesn't that make mezzanine lending quite risky?

I'm curious, how accurate is this picture, and is there anything else to know about mezzanine financing? Have any of you used mezzanine debt in your own deals and how do you think about it in your own investments?

[Ellis San Jose]

if borrow defaults on bank loan, mezz debt has the option to bring it current & foreclose from their own position. Bank can only claim their debt plus legal fees & expenses.  The remaining equity if any goes to Mezz debt lender.