Mezzanine debt sounds a bit fancy, but it really is a less secure form of debt. Mezzanine debt is a form of financing that sits between senior mortgage debt and the property owner’s equity in the capital structure of a real estate investment. It is generally used when a borrower needs more capital than a traditional first mortgage will provide but does not want to raise additional equity from investors. Because the senior lender has the first claim on the property and its proceeds, mezzanine debt carries greater risk and typically comes with a higher interest rate than senior debt. It is commonly used in commercial real estate acquisitions, development projects, recapitalizations, and other transactions involving substantial financing needs.
Unlike a traditional mortgage, mezzanine debt is often secured by a pledge of the borrower’s ownership interest in the entity that owns the real estate rather than by a direct lien on the property itself. If the borrower defaults, the mezzanine lender may have the right to foreclose on that pledged ownership interest and take control of the property-owning entity, subject to the terms of agreements with the senior lender. Mezzanine financing can help fill the gap between the amount available through a first mortgage and the equity contributed by the property owner, but its higher cost and subordinate position make it a more expensive and complex form of real estate financing.
Mezzanine Debt
