Pledge of the LLC instead of a lien on the building. Better or worse for the lender?

The number that decides it is what the remedy costs you in time. If a UCC sale on the pledged interest takes you weeks and a mortgage foreclosure in that state takes you a year and change, the pledge is worth real money, and foreclosure timelines vary a lot by state so you price it deal by deal. But the speed only matters if you have cash ready to keep the senior current the morning after. I've looked at a mezz slice where the senior debt service was about $340k a quarter. Fast remedy, and I still would have needed $340k I hadn't budgeted.

@warrant your second framing is the one underwriting cares about. When you take the equity you're buying the senior loan too, and the senior loan almost certainly has a change of control provision. So the question isn't whether the pledge works, it's whether the senior will let you sit in that chair without calling a default, and that answer lives in the intercreditor agreement rather than in the pledge itself. I underwrite mezz as if I will end up owning the property with the existing senior on it at existing terms, and if that scenario doesn't clear my hurdle I pass.

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?

@juniper I asked almost the same thing a month ago. From what I understand 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. Someone correct me if that's off, I'm still mostly confused about this whole corner.

@juniper 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.

@warrant the answer to your question is mostly written in a document you didn't mention, which is the intercreditor. Standstill length, cure rights, whether you can even take the equity without the senior's blessing, and the qualified transferee definition that decides who's allowed to end up holding it. I've read intercreditors where the pledge was fine on its face and the standstill made the remedy useless for a year. Pledge good, remedy slow, same outcome as no pledge if the sponsor's problem is 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 chair it's the scariest structure I've been offered. A second mortgage takes the property. A pledge takes my entity, which is where my other relationships and my tax position live. I passed on a mezz quote on a small flex portfolio partly for that reason, and partly because the coupon was more than double what my senior was costing.

@sextant's framing changed my vote. If you have to underwrite as if you'll own the building with the existing senior attached, then the pledge is a delivery mechanism and the real risk is the senior loan you inherit. Better or worse than a lien on the building depends entirely on how ugly that senior is.