Mezzanine Financing
FinancingMezzanine financing is subordinate debt that fills the gap between the senior (first-position) loan and the sponsor’s equity in the capital stack. It is called “mezzanine” because it sits on a mezzanine level — below equity but above senior debt in repayment priority. Because it takes more risk than the senior lender, it charges a significantly higher interest rate and often includes equity-like upside, such as warrants or conversion rights.
How it works. If a property costs $10M and the senior lender will only go to 65% LTV ($6.5M), the sponsor needs $3.5M in equity. A mezzanine lender might provide $1.5M at 12–16% interest (plus an equity kicker), reducing the sponsor’s equity requirement to $2M. The mezzanine loan is secured not by the real estate itself (that is the senior lender’s collateral) but by a pledge of the ownership interests in the entity that owns the property. This structural nuance means the mezzanine lender can foreclose on the LLC — taking control of the asset — without triggering the senior lender’s rights, and without going through a judicial foreclosure.
Mezzanine debt is expensive. Interest rates commonly run 10–18%, often with an additional equity kicker (warrants or a profit share). It is bridge capital — best used to close a gap on a deal with strong near-term value creation, not as permanent financing.
Example. A sponsor acquires a $12M office-to-multifamily conversion. The senior construction loan provides $7.2M (60% LTC). The sponsor has $2.8M in LP equity. The remaining $2M gap is filled by a mezzanine lender at 14% interest with warrants for 5% of the project’s GP economics. Once the property is stabilized and refinanced into a permanent agency loan, the mezzanine is paid off, and the sponsor retains full control.
Mezzanine financing sits above senior debt in the capital stack. For the senior layer it bridges, see DSCR and agency loans.