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A Backup Quarterback View of Mezzanine Finance

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  • Antonio Mello
  • Erwan Quintin

Abstract

A significant number of real estate transactions involve the use of mezzanine finance. One obvious purpose of mezzanine debt is to plug financing gaps left by other forms of financing. In this article, we formalize a complementary role of mezzanine finance in a simple model with moral hazard on the part of operators. According to our theory, mezzanine financiers serve as substitute operating agents—backup quarterbacks of sorts—ready to replace the original operator when the project underperforms. The presence of skilled mezzanine investors in the capital structure makes it cheaper to provide incentives to incumbent operators.

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  • Antonio Mello & Erwan Quintin, 2021. "A Backup Quarterback View of Mezzanine Finance," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(S2), pages 526-556, September.
    • Handle: RePEc:bla:reesec:v:49:y:2021:i:s2:p:526-556
    DOI: 10.1111/1540-6229.12299
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    1. Spear, Stephen E. & Wang, Cheng, 2005. "When to fire a CEO: optimal termination in dynamic contracts," Journal of Economic Theory, Elsevier, vol. 120(2), pages 239-256, February.

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