Subordinate capital solutions to fill the gap between senior debt and common equity
Mezzanine debt and preferred equity are forms of subordinate capital that sit between senior debt and common equity in the capital stack. They allow sponsors to increase leverage beyond what senior lenders will provide, reducing the cash equity required for acquisitions, developments, and recapitalizations while maintaining operational control.
George Smith Partners has deep relationships with mezzanine lenders and preferred equity providers, from institutional debt funds to family offices and private capital sources. We understand the structural differences between these capital types and help sponsors determine which approach best fits their transaction and business objectives.
Subordinate debt secured by a pledge of the borrower's ownership interest in the property-owning entity. Provides a fixed return with no upside participation.
An equity investment with priority distribution rights over common equity, structured within the ownership entity. May include upside participation.
Increase leverage from 65% (senior only) to 85-90% of cost, significantly reducing the common equity required for transactions.
By reducing cash equity while maintaining upside, mezzanine and preferred equity can significantly increase sponsor IRR and equity multiples.
Finance the acquisition of partnership interests without disturbing existing senior debt through preferred equity structured within the ownership entity.
Extract equity from existing assets while maintaining ownership. Subordinate capital allows cash-out without replacing senior debt.
Fill the gap between construction loan proceeds and total project cost, particularly valuable when senior construction leverage is constrained.
Provide capital infusion for distressed situations—fund capital improvements, cure defaults, or inject liquidity to stabilize properties.
$5 million to $100+ million
Up to 85-90% of value or cost
10-15% depending on leverage and risk
12-18% with potential upside participation
2 to 10 years, coterminous with senior debt
Current pay, accrual, or hybrid
Often flexible with minimum hold periods
Nationwide
We help sponsors navigate the choice between mezzanine debt and preferred equity, considering tax implications, senior lender requirements, and business objectives. The right structure depends on the specific transaction and borrower situation.
We can arrange senior debt and subordinate capital simultaneously, ensuring the pieces fit together and close on the same timeline. This integrated approach is particularly valuable for construction and value-add transactions.
Our relationships span the full spectrum of subordinate capital providers—from large institutional debt funds to family offices. This breadth allows us to find competitive capital for a wide range of transaction sizes and risk profiles.
Most senior lenders will permit mezzanine debt subject to an intercreditor agreement that governs the relationship between senior and subordinate lenders. However, some loan programs prohibit subordinate financing. Preferred equity is sometimes used as an alternative when mezzanine debt is restricted.
Neither is universally better -- the right choice depends on senior lender requirements, tax considerations, and the specific transaction. Mezzanine debt often has lower all-in cost but requires intercreditor agreements, while preferred equity offers more flexibility but may cost more.
Current market rates are typically 10-15% for mezzanine debt and 12-18% for preferred equity. Rates vary based on leverage, property type, sponsor experience, and overall risk profile. Preferred equity investors may also receive modest upside participation above hurdle returns.
Most institutional providers have minimums of $5-10 million, though some family offices and smaller funds will consider investments as low as $2-3 million. Transaction economics typically work best for subordinate capital above $5 million.
Our team can help you identify the right mezzanine or preferred equity solution for your transaction.
Discuss Your Capital Needs