Subordinate debt secured by ownership interest, not the property.
A mezzanine loan is a layer of subordinate debt that sits between senior mortgage debt and the equity investor in the capital stack. Unlike a mortgage, a mezz loan is secured by the borrower's ownership interest in the property-owning entity (a pledge of LLC interests), not by the property itself. Mezz fills the gap between maximum senior debt and what the sponsor can fund with equity.
Mezzanine debt evolved because senior lenders cap their exposure (typically 60–75% LTV/LTC), but many deals need more leverage to pencil — especially in high-cost markets or rising-cost construction environments. Mezz fills the gap. A typical structure: 65% senior mortgage + 15% mezz + 20% sponsor equity = 100% of capital. The sponsor uses leverage to amplify returns; the senior lender stays in the safer first-position; the mezz lender takes the bigger risk at correspondingly higher pricing.
Mezz pricing reflects the risk position. While senior bridge debt prices SOFR + 250–500 bps, mezz debt typically prices SOFR + 700–1200 bps or fixed rates of 11–16% in the current environment. Some mezz also includes equity-like upside features — preferred returns, accrued interest, and sometimes a percentage of upside on exit. The mezz lender is taking near-equity risk at debt-like predictability.
Intercreditor agreements govern the relationship between senior and mezz lenders. The senior lender has first claim on property cash flow and proceeds; the mezz lender has second claim. If the senior defaults, the mezz lender typically has rights to step into the senior's position to protect their investment — but only after curing the senior's defaults and complying with structured intercreditor terms.
For sponsors, mezz expands deal capacity without ceding equity. A sponsor with $5M of equity can do a $20M deal with 75% senior + sponsor equity, or a $30M deal with 65% senior + 10% mezz + sponsor equity. The mezz cost is offset by the larger deal size if returns scale appropriately. Smart sponsors model both scenarios and pick based on target IRR vs. risk.
| Total project cost | $32,000,000 |
| Senior debt (65% LTC) | $20,800,000 (SOFR + 350) |
| Mezz debt (12% LTC) | $3,840,000 (12.5% fixed) |
| Sponsor equity (23%) | $7,360,000 |
| Combined cost of capital | |
| Senior interest (year 1, IO) | $1,750,000 |
| Mezz interest (year 1, IO) | $480,000 |
| Total annual debt service (IO) | $2,230,000 |
| Equity contribution required | $7.36M vs $11.2M without mezz |
A layer of subordinate debt sitting between senior mortgage debt and the equity investor in the capital stack. Secured by the borrower's ownership interest in the property entity rather than by the property itself.
Mezzanine is technically debt with fixed return obligations and clear default remedies. Preferred equity is an equity interest with priority returns. Mezz typically has better lender remedies in default; preferred equity has more flexible payment terms.
Typically 11–16% fixed or SOFR + 700–1200 bps floating, reflecting the subordinated risk position. Some mezz also includes equity-like upside features.
When senior debt + sponsor equity isn't enough to fund the deal, but giving up equity to LP partners would dilute sponsor returns more than mezz cost would. Common on value-add and ground-up where capital stack needs are large.
The agreement between senior and mezz lenders governing their relative rights — payment priority, default remedies, and the mezz lender's right to cure senior defaults to protect their position.
Matrix structures senior bridge and construction debt designed to work alongside mezz and preferred equity — full capital stack solutions for value-add and development.
