When construction costs exceed the amount of the construction loan, a developer may seek to cover the gap using mezzanine financing. All of the following statements regarding mezzanine debt are true EXCEPT:
A) Mezzanine debt use is less expensive than normal construction financing
B) Mezzanine debt use avoids dilution of equity returns
C) Mezzanine debt use is less expensive than equity financing
D) Mezzanine debt use avoids the foreclosure process in the case of default

Question

Quizplus · Accepted Answer

Mezzanine debt is typically more expensive than traditional construction financing and equity financing. It is often used as a last resort when other forms of financing are not available or insufficient to cover the gap in construction costs. Mezzanine financing also does not prevent foreclosure in the case of default and can result in a loss of equity returns.

When Construction Costs Exceed the Amount of the Construction Loan