Mezzanine Debt
Subordinate financing that sits between senior debt and equity in the capital stack. It fills the gap above a first mortgage, carries a higher rate, and is often secured by a pledge of ownership interests.
Mezzanine debt ("mezz") is a layer of financing that sits between the senior loan and the owner's equity in a deal's capital stack. It's subordinate to the first mortgage — meaning it gets paid after the senior lender — but ranks ahead of the equity, so it carries more risk than the senior loan and is priced accordingly with a higher interest rate.
Where it sits in the stack
From safest (paid first) to riskiest (paid last):
| Layer | Priority | Typical cost |
|---|---|---|
| Senior debt (first mortgage) | 1st | Lowest |
| Mezzanine debt | 2nd | Higher |
| Equity | Last | Highest (uncapped) |
How mezzanine is secured
Here's the key structural quirk: mezz debt is usually not secured by a lien on the real estate itself. Instead, it's secured by a pledge of the borrowing entity's ownership interests (the membership interests in the SPE/LLC that owns the property). If the borrower defaults, the mezz lender forecloses on the ownership of the entity — taking control of the property indirectly — rather than foreclosing on the deed. This lets the senior mortgage stay undisturbed.
What it's used for
Mezzanine debt fills the gap when senior financing won't cover enough of the deal:
- A senior lender funds 65% LTV; the sponsor wants 80% leverage. Mezz covers the 65–80% slice.
- It lets a sponsor acquire or recapitalize a larger asset with less of their own equity.
- Common on commercial and larger multifamily deals; on small residential investor deals the analog is a second-lien or gap funding.
The trade-off
Mezz boosts leverage and can amplify equity returns, but it's expensive and adds a creditor who can seize control on default. It also requires the senior lender's consent (an intercreditor agreement governs the relationship). For most single-family investors, true mezzanine debt is rare — but understanding it clarifies how leverage layers stack and why each higher layer costs more. The same logic scales down to the second liens and gap funding that residential investors actually use.
Frequently asked questions
How is mezzanine debt different from a second mortgage?
A second mortgage is secured by a junior lien on the real estate itself. Mezzanine debt is usually secured by a pledge of the ownership interests in the entity that owns the property — so the mezz lender forecloses on the entity, not the deed. This structure keeps the senior mortgage undisturbed on default.
Why is mezzanine debt more expensive than the senior loan?
Because it's subordinate — the mezz lender gets paid only after the senior lender, so it bears more risk if the deal underperforms. To compensate, mezzanine debt carries a higher interest rate (and sometimes equity-like features) than the first mortgage.
Do single-family investors use mezzanine debt?
Rarely. True mezzanine debt is a commercial and large-multifamily tool. Single-family and small investors achieve similar gap-filling leverage through second-lien loans or gap funding, which serve the same purpose — bridging the space between senior debt and the cash they have.