Mezzanine Debt
Subordinate financing that sits between senior debt and equity, often secured by a pledge of ownership interests.
Mezzanine debt is a layer of financing that sits above equity but below the senior loan in the capital stack. Rather than a mortgage on the real estate, it is usually secured by a pledge of the ownership interests in the entity that holds the property, which lets it close alongside senior debt.
Sponsors use mezzanine debt to raise total leverage when the senior loan alone does not cover the deal. Combined with a senior loan, mezzanine can push total leverage to 85 to 90% of cost or value. Because it takes more risk, it prices higher, commonly 12 to 16%.
The senior lender and the mezzanine lender sign an intercreditor agreement that spells out who gets paid first and what happens in a default. That document governs how the two loans coexist and is central to structuring the deal.
Formula
Mezzanine debt sits between senior debt and equity in the capital stack
Worked Example
A project costs $10,000,000. A senior lender funds $6,500,000 (65% LTC) and a mezzanine lender adds $2,000,000, bringing total leverage to 85%. The sponsor contributes the remaining $1,500,000 in equity.
Why It Matters
Mezzanine debt lets sponsors do bigger deals with less equity, but the higher rate and intercreditor terms add complexity and risk. It works best when projected returns comfortably exceed the cost of the extra leverage.
Related Terms
Related Programs and Tools
Frequently Asked Questions
How is mezzanine debt secured?
Usually by a pledge of the ownership interests in the entity that owns the property, not a mortgage on the real estate. That lets it sit behind the senior loan.
What does mezzanine debt cost?
It commonly prices in the 12 to 16% range because it takes more risk than the senior loan. Some structures blend a current pay rate with accrued interest.