Mezzanine debt and preferred equity fill the gap between senior debt and common equity. Explore capital stack strategies, pricing trends, and deal structures.
Mezzanine debt is secured by a pledge of ownership interests and has foreclosure remedies similar to a mortgage. Preferred equity is an equity position with priority distributions but no lien on the property. Mezzanine debt typically has a lower cost (10-14%) than preferred equity (12-18%) because of its stronger security position. The choice often depends on senior lender restrictions and state-specific foreclosure timelines.
Mezzanine financing is appropriate when you need leverage above what senior lenders will provide (typically 65-75% LTV) but want to minimize equity dilution. Common uses include acquisitions where additional leverage improves returns, recapitalizations to extract equity, and development projects where the sponsor wants to reduce their equity contribution.