Is a pledge of the LLC better or worse for a mezzanine lender than a lien on the building

The number that decides it is what the remedy costs in time. If a UCC sale on the pledged interest takes weeks and a mortgage foreclosure in that state takes a year and change, the pledge is worth real money, and foreclosure timelines vary a lot by state so it gets priced deal by deal. But the speed only matters if there is cash ready to keep the senior current the morning after. Take a mezz slice where the senior debt service runs about $340k a quarter: fast remedy, and still a need for $340k that was not budgeted.

@dmitri_248 that second framing is the one underwriting cares about. Taking the equity means taking the senior loan too, and the senior loan almost certainly has a change of control provision. So the real question is not whether the pledge works, it is whether the senior lender will allow a new party to sit in that chair without calling a default, and that answer lives in the intercreditor agreement rather than in the pledge itself. The sound way to underwrite mezz is to assume ownership of the property will land with the existing senior in place on existing terms, and if that scenario does not clear the hurdle, the deal gets passed on.

Sorry for the basic one, I'm reading this twice like usual. When you "pledge the membership interests," is there a physical thing? Like with a mortgage there's a document recorded at the county. Is there something recorded for the pledge, or is it just the agreement in a drawer somewhere?

@kevin_lombard the mezz collateral is paper about a company rather than paper about the roof, and it's perfected under the UCC instead of by recording at the county, which is part of why the process runs differently. Worth confirming with someone deeper in structured finance, since this corner has more edge cases than it first appears.

@kevin_lombard it's a pledge agreement plus a UCC filing, and typically the certificates or a transfer power get held by the mezz lender's counsel. Recording practice for real property is a county thing and varies by state, but the equity pledge side is UCC and mechanically different, so confirm with counsel in the state the entity is organized in rather than the state the dirt is in.

My own diligence list on these starts with the entity's operating agreement. If it restricts transfers, or requires consent from other members, or has some buy-sell nobody mentioned, your pledge is worth whatever those restrictions let it be worth.

@dmitri_248 the answer to that question is mostly written in a document that has not been mentioned yet, the intercreditor agreement. Standstill length, cure rights, whether the mezz lender can even take the equity without the senior's blessing, and the qualified transferee definition that decides who is allowed to end up holding it, all matter more than the pledge itself. An intercreditor can look fine on its face while a long standstill makes the remedy useless for a year. Pledge good, remedy slow, is functionally the same outcome as no pledge if the sponsor's problem turns out to be terminal.

Voted worse, and I'll say why. I'm still figuring out where to put capital and I'd rather own a claim I can explain in one sentence. "I own the company that owes the bank" is not that sentence.

From the borrower's chair a pledge structure is often the scarier of the two. A second mortgage takes the property. A pledge takes the entity, which is where other lender relationships and the tax position live. A borrower weighing a mezz quote on a small flex portfolio should treat that entity risk as real money, on top of a coupon that is commonly more than double what a senior loan is costing.

@dpatel_re's framing is the right one to vote on. If the analysis has to assume ownership of the building with the existing senior attached, then the pledge is a delivery mechanism and the real risk is the senior loan being inherited. Better or worse than a lien on the building depends entirely on how ugly that senior is.