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WSJ: Mezz Loan Foreclosures Hit Record Pace

Lenders this year have issued a record number of foreclosure notices for high-risk commercial property loans, according to a Wall Street Journal analysis. The WSJ analysis found notices for 62 mezzanine loans and other high-risk loans this year through October, more than double 2022’s rate and likely the highest total ever for a single year. The dollar value of the foreclosures isn’t known because the loans don’t appear in property records.

The WSJ reported that the increase in mezz loan foreclosure announcements, while not large in absolute numbers, offers a more immediate measure of commercial real estate distress than mortgage foreclosure rates. Although mortgage foreclosures can take months or even years to play out, foreclosing on mezz loans is often quick and easy because they aren’t technically mortgages.

Following the Great Recession, mezz loans took off as regulators cracked down on big banks and they became more conservative lenders, according to the WSJ. Mezz debt was popular among lenders because yields often exceeded 10%, and became big business for companies such as Blackstone, KKR and Starwood Capital, which collectively lent billions. 

South Korean asset managers also became big mezz lenders, lending against hotels and office towers in cities such as New York and Los Angeles. Finance companies pooled billions from thousands of would-be immigrants in the EB-5 program, turning them into mezz loans to developers. 

That debt allowed investors to bid up prices while putting in little of their own money, inflating the CRE market leading up to 2022. Now, real-estate prices are falling and many of these loans are in default. 

“A lot of borrowers have basically said ‘I can’t hold this asset any longer, I can’t keep putting money in,’” Terri Adler, managing partner at law firm Adler & Stachenfeld, told the WSJ. “And the lenders have said, ‘OK, we’ll take it back.’”

Pictured: The Margaritaville Resort in Times Square, whose developer defaulted on a $57-million mezzanine loan in March 2023.


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About Paul Bubny

Paul Bubny serves as Senior Content Director for Connect Commercial Real Estate, a role to which he brings 13-plus years’ experience covering the commercial real estate industry and 30-plus years in business-to-business journalism. In this capacity, he oversees daily operations while also reporting on both local/regional markets and national trends, covering individual transactions across all property types, as well as delving into broader subject matter. He produces 15-20 daily news stories per day and works with the Connect team and clients to develop longer-form content, ranging from Q&As to thought-leadership pieces. Prior to joining Connect, Paul was Managing Editor for both Real Estate Forum and at American Lawyer Media, where he oversaw operations at both publications while also producing daily news and feature-length articles. His tenure in B2B publishing stretches back into the print era, and he has served as Editor in Chief on four national trade publications. Since 1999, Paul has volunteered as the newsletter editor of passenger rail advocacy groups (one national, one local).

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