What mezzanine debt does
Mezzanine debt is an additional borrowing obligation, commonly secured by a pledge of interests in the property-owning entity. It can address part of a financing gap when the property can support the combined obligations and the senior lender permits the structure.
Begin with the gap and repayment plan
Calculate the total funds required, the senior loan available and the sponsor contribution. Include transaction costs and reserves. Then test how the proposed mezzanine loan would be serviced and repaid if leasing takes longer or sale proceeds are lower than expected.
Coordinate with the senior lender
Review restrictions on additional debt, transfers and pledged ownership interests. An intercreditor agreement may address payment priority, notices, cure rights, enforcement and transfers. The documents and lender approvals determine the permitted structure.
Request a quote for the transaction
Pricing depends on the property, leverage, cash flow, sponsor, term and repayment risk. Compare current-pay and accrued interest, fees, minimum interest, extension terms and repayment obligations. A generic rate range cannot establish what a lender will offer.
Compare alternatives
A larger senior loan, seller financing, additional sponsor capital, a smaller project budget or an extension of the existing loan may address the gap. Adding debt should improve the financing plan without relying on an unsupported exit value.
Related resources
Separate the funding gap from the repayment gap
A project may have enough value to attract additional debt but insufficient current income to service it. Show whether interest will be paid from operations, funded reserves or another identified source. If interest accrues, include the accumulated balance in the amount due at repayment.
The exit test should consider the combined senior and mezzanine balances, sale or refinance costs and the cash needed to complete the business plan. Using the same optimistic valuation for every scenario can conceal the point at which the structure stops working.
An illustrative financing review
Assume total project uses are $12 million, a proposed senior loan provides $8 million and the sponsor has $3 million available. The initial gap is $1 million. That calculation identifies a need; it does not establish that the property can support another $1 million of debt.
Add the proposed mezzanine fees, interest and any reserves to the model. Recheck the amount needed and repayment under the revised structure. If the additional costs enlarge the gap, revisit the budget or financing plan instead of assuming the first sizing result is final.
Discuss your property financing or explore sponsor consulting.