Fill the Gap Between Senior Debt and Your Equity

Fill the Gap Between Senior Debt and Your Equity

When senior financing generally stops at 65% to 75% and you don't want to write a larger equity check, mezzanine debt closes the difference and generally takes total leverage to 85% to 90%.

Fill the Gap Between Senior Debt and Your Equity

When senior financing generally stops at 65% to 75% and you don't want to write a larger equity check, mezzanine debt closes the difference and generally takes total leverage to 85% to 90%.

Subordinate Capital That Sits Behind the Senior Loan

Mezzanine financing occupies the space in the capital stack between the senior mortgage and the borrower's equity. When a senior lender generally caps out at 65% to 75% loan-to-value, mezzanine debt layers on top to bring total leverage to generally 85% to 90%, reducing the equity a sponsor has to put into the deal. It is priced well above senior debt because the mezzanine lender sits in a subordinate position and gets repaid only after the senior loan is current. Instead of recording a mortgage lien, mezzanine loans are usually secured by a pledge of the ownership interests in the entity that holds the property, which lets the lender step in quickly if the deal goes sideways. Every mezzanine placement involves an intercreditor agreement between the senior and mezzanine lenders that spells out cure rights, standstill periods, and foreclosure procedures. CapitalAx sources mezzanine capital from debt funds, private equity groups, and specialty lenders who know how to structure this layer without upsetting the senior loan.

Key Terms

Loan Range: Typically $1M to $50M+
Position: Subordinate to senior debt
Total Leverage: Generally 85% to 90% combined
Pricing: Above senior debt, set by leverage, position, and deal risk
Terms: Generally 2 to 10 years
Security: Pledge of ownership interests

Who Is It For

  • Sponsors who want to reduce the equity required on an acquisition or development
  • Owners recapitalizing a property without selling or refinancing the senior loan
  • Developers closing the gap between a construction loan and total project cost
  • Investors pursuing larger deals than their available equity would otherwise allow
  • Operators funding value-add capital expenditures on top of existing senior debt

Common Use Cases

  • Increasing total leverage above what a senior lender will fund
  • Recapitalizing a property to return equity to partners
  • Filling the funding gap on ground-up construction and major renovation
  • Financing a portion of an acquisition to preserve investor equity
  • Funding value-add capital improvements behind a senior mortgage

Borrower Scenarios

  • A multifamily sponsor acquiring a stabilized garden-style apartment complex, adding a mezzanine piece behind the senior mortgage to push total leverage well past what the senior lender would fund alone and cut the required equity check by more than half.
  • A developer on a ground-up multifamily project whose construction loan covers most but not all of total project cost, closing a mezzanine layer secured by a pledge of the development entity to fund the remaining gap without bringing in a new equity partner.
  • An owner of a stabilized office building recapitalizing to return trapped equity to partners, layering mezzanine debt behind the existing senior mortgage rather than triggering the prepayment penalty on a full refinance.
  • A hotel operator funding a brand-mandated renovation with mezzanine capital behind a flagged senior loan, structured with an intercreditor agreement that gave the senior lender a defined standstill period and the mezzanine lender defined cure rights.

Why CapitalAx

Lenders Who Structure the Full Capital Stack: Mezzanine debt only works when the senior loan and the mezzanine layer are structured together. We coordinate both pieces at the same time, matching your deal with senior lenders who accept a mezzanine layer and mezzanine funds that price competitively for your leverage target.
Intercreditor Negotiation Experience: The intercreditor agreement decides how much control each lender has and how fast a problem gets resolved. We know which terms mezzanine lenders will flex on and which ones senior lenders insist on, so the negotiation moves quickly instead of stalling the closing for months.
Blended Cost Analysis Before You Commit: Adding a mezzanine layer changes your total cost of capital and your returns. We model the blended rate against the equity you would otherwise raise so you can see whether the mezzanine layer actually improves your deal before signing a term sheet.

Related Loan Programs

Frequently Asked Questions

How is mezzanine debt different from a second mortgage?

A second mortgage records a junior lien against the property itself. Mezzanine debt is instead secured by a pledge of the equity interests in the entity that owns the property. That structure lets the mezzanine lender take control of the ownership entity through a UCC foreclosure much faster than a traditional mortgage foreclosure, which is why senior lenders often prefer a mezzanine layer over a recorded second lien.

Why does mezzanine financing cost more than the senior loan?

Mezzanine lenders sit behind the senior loan and get repaid only after the senior debt is current. That subordinate position carries more risk, so pricing runs well above a conventional senior mortgage. The blended cost of the two layers is still often lower than the return a sponsor would give up by raising additional equity. Every placement is priced on its own merits. Actual pricing depends on leverage, the senior lender's terms, and the specific mezzanine fund.

What is an intercreditor agreement?

It is the contract between the senior lender and the mezzanine lender that governs how the two loans coexist. It defines the mezzanine lender's cure rights if the senior loan defaults, standstill periods before any enforcement action, and the process for taking over the ownership entity. No mezzanine loan closes without one, and negotiating its terms is a big part of getting the deal done.