Mezzanine Debt

Mezzanine debt sits between senior mortgage debt and equity in the capital stack, secured not by the real estate itself but by a pledge of the ownership interests in the entity that owns the property. It lets sponsors increase total leverage beyond what the senior lender allows, typically filling the gap from 65–75% up to 80–90% combined LTV, at rates well above senior debt to compensate for its subordinate position.

Mezzanine debt is a structural workaround for the fact that most senior lenders cap leverage well below what a sponsor may want, particularly on higher-return value-add or development deals. Rather than raising more expensive common equity to fill that gap, sponsors can bring in a mezzanine lender who is secured by a pledge of the LLC membership interests that own the property — not a mortgage lien — which lets it close and enforce quickly (via UCC foreclosure) without going through a judicial mortgage foreclosure process.

Because mezzanine debt is contractually and structurally subordinate to the senior loan, it carries meaningfully higher pricing, often in the low-to-high teens, and is governed by an intercreditor agreement that spells out the mezzanine lender's rights, standstill periods, and cure rights relative to the senior lender.

Mezzanine debt still sits above preferred equity and common equity in priority of payment and loss absorption, making the full capital stack, from safest to riskiest: senior debt, mezzanine debt, preferred equity, common equity.

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