Mezzanine Debt
Subordinate financing that sits between senior debt and equity in the capital stack, secured by a pledge of ownership interests rather than a mortgage on the property. Mezzanine debt allows borrowers to achieve higher leverage (up to 85-90% of cost) while keeping the senior loan in compliance. Rates are higher than senior debt but lower than equity returns.
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Preferred Equity
An equity investment that receives priority distributions before common equity but after debt service. Preferred equity provides additional capital above senior debt limits with returns typically in the 10-15% range. Unlike mezzanine debt, preferred equity is not secured by a pledge of ownership and has different foreclosure remedies.
Capital Stack
The layered structure of capital used to finance a real estate investment, arranged by priority of repayment. From lowest risk to highest: senior debt, mezzanine debt, preferred equity, and common equity. Each layer has different risk/return profiles. Understanding the capital stack is essential for structuring deals and evaluating investment opportunities.
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