Mezzanine Financing for CRE | Gap Funding & Second-Position Debt

Mezzanine debt fills the capital stack gap between senior debt (first mortgage, typically 60–75% LTV) and sponsor equity. Instead of contributing 25–40% cash equity, a mezz loan can reduce your out-of-pocket equity to 10–25% — freeing capital for other investments or operational needs.

Unlike a second mortgage secured by real property, mezzanine debt is typically secured by a pledge of the borrowing entity’s ownership interests. This structure avoids intercreditor conflicts with the senior lender’s mortgage lien and allows faster enforcement in the event of default.

Reduce Equity Requirement

Lower your cash contribution from 25–40% down to 10–25%. Deploy freed-up capital across multiple deals instead of concentrating in one.

Maintain Ownership Control

Unlike JV equity, mezzanine is debt — no profit sharing, no decision-making dilution, no promoted interest to a capital partner.

Interest-Only Structure

Most mezz loans are interest-only with bullet repayment at maturity, preserving cash flow during the hold or value-add period.

Flexible Exit Strategies

Repay through property sale, refinancing into a higher-leverage permanent loan, or recapitalization once NOI increases.

Boost Return on Equity

Positive leverage effect: if the property yield exceeds the blended cost of senior + mezz debt, your equity returns amplify significantly.

Tax-Deductible Interest

Mezzanine interest payments are generally tax-deductible as a business expense, improving after-tax returns compared to equity contributions.

HOW MEZZANINE FINANCING WORKS

Second-Position Capital for Larger Deals

Reduce Equity Requirement

Lower your cash contribution from 25–40% down to 10–25%. Deploy freed-up capital across multiple deals instead of concentrating in one.

Maintain Ownership Control

Unlike JV equity, mezzanine is debt — no profit sharing, no decision-making dilution, no promoted interest to a capital partner.

Interest-Only Structure

Most mezz loans are interest-only with bullet repayment at maturity, preserving cash flow during the hold or value-add period.

Flexible Exit Strategies

Repay through property sale, refinancing into a higher-leverage permanent loan, or recapitalization once NOI increases.

Boost Return on Equity

Positive leverage effect: if the property yield exceeds the blended cost of senior + mezz debt, your equity returns amplify significantly.

Tax-Deductible Interest

Mezzanine interest payments are generally tax-deductible as a business expense, improving after-tax returns compared to equity contributions.

CAPITAL STACK COMPARISON

Mezzanine vs. Preferred Equity vs. JV Equity

Three ways to fill the gap between senior debt and sponsor equity. Each has different implications for control, cost, and risk.

Mezzanine Debt

Preferred Equity

JV Equity

Structure

Debt (loan)

Equity with pref return

Equity partnership

Cost

8 – 15% fixed

10 – 18% pref

20–30%+ IRR target

Control Dilution

None

Limited

Significant

Profit Sharing

None

Sometimes

Yes (promoted)

Tax Deductible

Yes (interest)

Repayment

Fixed schedule

Pref return + exit

At sale / refi

Best For

Leverage, control

CMBS stack supplement

Large equity gap

FREQUENTLY ASKED QUESTIONS

Mezzanine Financing FAQ

What is the typical capital stack with mezzanine debt?

A common structure: 60–70% senior debt (first mortgage), 10–20% mezzanine, and 10–25% sponsor equity. This brings total leverage to 75–90% of project cost or value, significantly reducing the cash equity needed from the sponsor.

Does my senior lender need to approve mezzanine financing?

Yes. An intercreditor agreement between the senior lender and mezz lender is required. This defines rights, remedies, and priorities in default scenarios. Some CMBS and agency loans specifically prohibit or restrict subordinate debt, so check your senior loan documents first.

What collateral secures a mezzanine loan?

Mezzanine debt is secured by a pledge of the borrowing entity’s ownership interests (LLC membership interest or partnership interest), not by a lien on the real property itself. This avoids conflict with the senior mortgage lien.

When does mezzanine financing make sense over JV equity?

When you want to maintain full control of the deal and avoid profit sharing. Mezz interest at 10–12% is significantly cheaper than giving up 30–50% of upside to a JV equity partner, provided the deal economics support the additional debt service.

What are the risks of mezzanine financing?

Higher leverage amplifies both returns and losses. If property performance declines, you still owe fixed mezz debt service. Default on the mezz can result in loss of ownership through a UCC foreclosure, which is faster than traditional mortgage foreclosure.

What deal sizes typically use mezzanine?

Mezzanine is most common on deals above $5M total capitalization, where the economics justify the additional structuring and legal costs. For smaller deals, preferred equity or SBA programs may be more practical alternatives.

Need Gap Capital for Your CRE Deal?

Our advisors structure mezzanine, preferred equity, and subordinate debt across our lending network. We negotiate intercreditor terms on your behalf.

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Fill the Gap Between Senior Debt and Equity

Second-Position Capital for Larger Deals

Second-Position Capital for Larger Deals

Fill the Gap Between Senior Debt and Equity

Mezzanine vs. Preferred Equity vs. JV Equity

Mezzanine Financing FAQ

Need Gap Capital for Your CRE Deal?

Other lenders make promises.
We put them in writing.

Five things your last lender should have done.

Fill the Gap Between Senior Debt and Equity

Second-Position Capital for Larger Deals

Second-Position Capital for Larger Deals

Fill the Gap Between Senior Debt and Equity

Mezzanine vs. Preferred Equity vs. JV Equity

Mezzanine Financing FAQ

Need Gap Capital for Your CRE Deal?

Other lenders make promises.We put them in writing.

Five things your last lender should have done.

Other lenders make promises.
We put them in writing.