Mezzanine Debt

Mezzanine Debt: What the Market Actually Requires

The defining feature of mezzanine debt is what secures it. The senior lender holds the mortgage on the real estate, so the mezzanine lender takes the next best thing: a perfected security interest in 100 percent of the equity interests of the entity that owns the property. On default, the mezzanine lender does not foreclose on the building. It conducts a UCC Article 9 foreclosure sale of the pledged ownership interests, a process that can run in as little as 30 to 60 days, and either sells the position or takes the keys by becoming the new owner of the borrower entity, with the senior mortgage still in place.

None of this works without an intercreditor agreement between the senior and mezzanine lenders. It sets the rules of engagement: the mezzanine lender's right to receive default notices and cure the senior loan, standstill periods limiting when it can exercise remedies, qualified-transferee requirements for who may take over the equity, and typically an option to purchase the senior loan at par after a senior default. Senior lenders negotiate these terms hard, and CMBS loans generally permit mezzanine debt only if it exists at origination with a pre-approved intercreditor. Agency lenders largely prohibit hard mezzanine behind their multifamily loans, which is one reason preferred equity dominates that space.

Debt funds, mortgage REITs, and dedicated mezzanine vehicles write most of the paper, usually filling the 65 to 85 percent slice of the capital stack. The classic sponsor mistake is treating mezzanine as generic gap money and ignoring the control mechanics: cure rights, sweep triggers, and the speed of UCC foreclosure mean a mezzanine lender can take a deal away from a sponsor far faster than any mortgage foreclosure would.

Why It Matters for Your Loan

Mezzanine debt buys leverage the senior lender will not provide, cutting the equity check on acquisitions and unlocking cash-out on refinances, but it introduces a second lender with fast remedies and real control. The intercreditor terms decide how much room a sponsor actually has in a downturn. Commercial Lending Solutions structures senior-plus-mezzanine stacks and prices them against stretch senior and preferred equity alternatives, because the cheapest headline coupon is not always the structure that survives a bad year.