Mezzanine debt is subordinate financing that sits between the senior mortgage and the common equity. It is secured by a pledge of the equity interests in the property-owning entity, not by the real estate itself. Used to fill capital-stack gaps when the senior loan does not size to the desired total leverage.
How does mezz differ from a second mortgage?
A second mortgage is a junior lien on the real estate. Mezz is a pledge of equity interests in the entity that owns the real estate. Practically, this means the mezz lender's foreclosure path is to take over the operating entity (UCC sale of equity interests) rather than to foreclose the property, which is faster than mortgage foreclosure.
Most senior CMBS, agency, and life co loans prohibit second mortgages but permit mezz subject to an intercreditor agreement that defines cure rights, payment priority, and behavior in default. The senior lender controls the intercreditor terms.
When is mezz the right answer?
Filling refi gaps where the senior at current rates does not size to the desired total proceeds and the sponsor does not want to write a full equity check. Filling acquisition gaps where the senior + common equity does not get the buyer to the seller's price. Adding leverage to a stabilized asset where the senior plus mezz combined still meets coverage tests.
Sources
- Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations · Mortgage Bankers Association · 2026-Q1
- Financial Stability Report · Board of Governors of the Federal Reserve System · 2025-11