Mezzanine Debt

Mezzanine debt is a junior loan that sits between senior debt and equity in the capital stack. It fills the gap when senior financing won't reach the total capital a deal needs — at a higher interest rate, because it's repaid only after the senior lender.

How it's used: mezz raises total leverage beyond what a first mortgage allows. Where a senior lender caps out around 60–70% LTV or LTC, a mezzanine piece can push combined leverage higher. It's typically secured by a pledge of the ownership interests rather than a mortgage on the property, and it's governed by an intercreditor agreement with the senior lender.

Why it matters: mezz is cheaper than equity but riskier and more expensive than senior debt — and it cuts both ways. It magnifies returns in a good outcome and is wiped out before the senior loan in a bad one. Stacking it also raises the combined debt service, squeezing DSCR and the equity's margin for error. It often sits just below the preferred return in priority of repayment.

Formula: Combined LTV = (Senior debt + Mezzanine debt) ÷ Value

See how added leverage moves investor returns in the IRR & equity multiple calculator.