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Taking a Security Interest In An Entity That Owns Real Estate- Does Mezzanine Financing Fall Under The California Real Estate Law Requiring A Licensed Broker?

Bingo Investments was in the business of making mezzanine loans in real estate matters. In a mezzanine loan, the borrower owns an entity (i.e. an LLC) that owns real property. The borrower does not actually own the real property, just the LLC. The mezzanine lender takes a security interest not in the real estate, but in the LLC that owns the real estate.

Bingo hired Greenlake Capital to find financing sources for Bingo’s loans. They were successful, and Bingo got a line of credit for $150 million. The credit line was secured by Bingo’s assets, likely Bingo’s equity interest in mezzanine borrowers (not the underlying in real property). But Bingo then refused to pay Greenlake its fee of $3 million, 2% of the funding. It claimed that Greenlake could not collect, because this arrangement required Greenlake to have a California real estate broker’s license to get paid. (California Business & Professions Code section 10131(d).

Greenlake argued that it only negotiated a credit facility that itself did not make any loans, and Bingo had yet to present a qualifying loan to the lender. The lower court ruled for Bingo.

The Court of Appeals found that an issue of fact remained as to the services provided by Greenlake. If the contract between Greenlake & Bingo has some aspects that fall outside the regulated activity, there remains the option of severing the offending conduct. Bingo, as a mezzanine lender, had no direct equity position in the underlying real property, so maybe 10131(d) does not apply.

This makes sense- if the lender forecloses, they get an interest in an LLC, not in real estate. There may be other LLC members to deal with. The point of forming an entity (the LLC) was for there to be no direct ownership of the property.

Nonetheless, a big question: why didn’t Greenlake have someone with a California Real Estate License? When ever real estate is involved in financing, the safe bet is to have a license involved.

Greenlake Capital LLC v. Bingo Investments LLC
(2010) 185 Cal App 4th 731.