Subordinate debt financing that sits between senior mortgage debt and equity in the capital stack. H Equities provides mezzanine loans from $3MM to $15MM, secured by a pledge of the borrower's ownership interests, with current-pay or partially accruing structures.
Overview
A mezzanine loan in commercial real estate is a form of subordinate debt that sits between the senior mortgage and the common equity in a property's capital stack. Unlike a first mortgage, mezzanine debt is not secured by a lien on the property itself. Instead, it is secured by a pledge of the borrower's ownership interests in the entity that owns the property. This structural difference gives mezzanine lenders a different set of remedies in a default scenario, primarily the right to take over ownership of the borrowing entity through a UCC foreclosure rather than a traditional mortgage foreclosure.
Mezzanine financing is used when a sponsor needs leverage beyond what a senior lender will provide but wants to minimize the amount of equity required. It is common in acquisitions, recapitalizations, and refinancings where the gap between senior debt proceeds and the total capitalization is too large to fill with common equity alone. Mezzanine debt is typically more expensive than senior debt because of its subordinate position, but it is less dilutive than raising additional equity.
H Equities provides mezzanine loans from $3MM to $15MM with current-pay or partially accruing interest structures. We work behind a wide range of senior lenders and can structure mezzanine financing to fit a variety of capital stacks and business plans across all major commercial real estate asset classes.
Key Parameters
Use Cases
Fill the gap between senior debt proceeds and total capitalization without raising additional common equity. Mezzanine debt provides incremental leverage while maintaining the sponsor's ownership percentage.
Acquire properties with less equity out of pocket by layering mezzanine debt on top of senior financing. Increase returns on equity by using the additional leverage strategically.
Extract equity from a property that has appreciated or stabilized by placing mezzanine debt behind the existing senior loan, returning capital to investors without a full refinance.
Complete the capital stack for ground-up or major renovation projects where the sponsor has secured senior construction financing but needs additional subordinate capital.
Process
Share the deal details including the senior loan terms, the total capitalization, and the gap you need to fill. We evaluate the full capital stack, not just our position.
We issue a mezzanine term sheet covering loan amount, interest structure, term, and intercreditor requirements. We coordinate with your senior lender from the start.
We negotiate the intercreditor agreement with the senior lender, complete our underwriting, and close. Our experience with intercreditor negotiations keeps timelines on track.
FAQ
Mezzanine debt is secured by a pledge of the borrower's ownership interests in the property-owning entity, while a second mortgage is secured by a lien on the property itself. The key practical difference is the foreclosure remedy: mezzanine lenders foreclose on the ownership interests through a UCC foreclosure, which is typically faster than a mortgage foreclosure. Many senior lenders prohibit second mortgages but permit mezzanine financing.
Mezzanine loans require an intercreditor agreement with the senior lender that governs the relationship between the two lenders, including cure rights, standstill periods, and notice requirements. Most institutional senior lenders are familiar with mezzanine structures and have standard intercreditor requirements.
Mezzanine loan rates are higher than senior debt rates to compensate for the subordinate position and higher risk. Rates vary based on total leverage, property type, sponsorship, and market conditions. Structures can include current pay, partial accrual, or full accrual depending on the property's cash flow profile.
Most institutional senior lenders permit mezzanine financing subject to their intercreditor requirements and total leverage limits. Some senior lenders restrict subordinate financing entirely. H Equities has experience working behind a wide range of senior lenders and can quickly determine compatibility.
A UCC foreclosure is the remedy available to a mezzanine lender under Article 9 of the Uniform Commercial Code. Rather than foreclosing on the property through a mortgage foreclosure, the mezzanine lender forecloses on the ownership interests in the entity that owns the property, effectively taking control of the entity and the underlying asset. UCC foreclosures are generally faster and less expensive than mortgage foreclosures.
Mezzanine loan terms are typically structured to be co-terminus with the senior debt, meaning they mature at the same time. Terms commonly range from 1 to 5 years depending on the senior loan term and the sponsor's business plan.
Mezzanine debt structures vary. Some mezzanine loans are non-recourse with standard carve-out guarantees, similar to senior debt. Others may require partial or full recourse depending on leverage, property type, and sponsor strength. The structure is negotiated on a deal-by-deal basis.
Learn More
Share your capital stack and senior loan details. We will tell you quickly if we can fill the gap.