How mezzanine debt works
Mezzanine debt is structured as a loan secured by a pledge of equity interests in the property-owning entity, rather than a mortgage on the property itself. This subordinate position lets mezzanine lenders offer higher leverage at higher pricing, and lets sponsors keep more of their equity working in other deals.
A typical mezzanine loan sits behind a 60 to 70 percent senior loan, taking the capital stack to 75 to 85 percent of value or cost.
When mezzanine financing makes sense
Mezzanine debt is most commonly used in these situations:
- Acquisition with limited sponsor equity available
- Refinance with cash-out exceeding what the senior lender will allow
- Recapitalization that brings in a new senior or restructures the existing stack
- Construction project that requires higher leverage than the senior construction loan provides
- Bridge-stabilization period requiring more proceeds than the senior bridge will provide
Representative mezzanine debt terms
Mezzanine pricing reflects the higher risk of the subordinate position.
- Loan size: $3M to $150M+
- Term: 1 to 10 years, typically aligned with the senior
- Pricing: 9% to 16% all-in, often structured as current pay plus accrued
- Leverage: typically takes the stack from 65% to 80-85% LTC/LTV
- Non-recourse with bad-boy carve-outs
- Intercreditor agreement with senior lender required
FAQ
Frequently asked questions
- What is the difference between mezzanine debt and preferred equity?
- Mezzanine debt is a loan secured by a pledge of equity in the property-owning entity, with default and foreclosure remedies governed by the UCC. Preferred equity is an equity investment, not debt, that receives priority distributions ahead of common equity but does not carry a loan's foreclosure remedies. Mezzanine sits between the senior loan and equity in the stack; preferred equity sits between mezzanine and common equity.
- What is the typical interest rate on mezzanine debt?
- Mezzanine debt pricing typically ranges from 9 percent to 16 percent all-in, depending on asset class, leverage, sponsor, and whether interest is current pay, accrued, or a combination. Construction mezzanine and stretch-leverage mezzanine price toward the upper end of the range.
- Is mezzanine debt non-recourse?
- Most institutional mezzanine debt is non-recourse with standard bad-boy carve-outs. Some construction mezzanine programs require partial completion guaranties from the sponsor.
- Does the senior lender have to approve a mezzanine loan?
- Yes. Every mezzanine loan requires an intercreditor agreement with the senior lender that governs cure rights, change-of-control remedies, modifications, and standstill periods. Senior lenders that allow mezzanine often have pre-negotiated intercreditor forms; others negotiate bespoke intercreditor terms transaction by transaction.
- How much can mezzanine debt add to my proceeds?
- Mezzanine debt typically takes the capital stack from a 60 to 70 percent senior to 75 to 85 percent total leverage on value or cost, depending on the asset class, basis, and sponsor. The marginal proceeds and pricing depend heavily on the senior loan's permitted subordination and the asset's stabilized debt yield.