Why a mezzanine loan fits medical office
A mezzanine loan is subordinate debt secured by a pledge of the ownership interests in the property-owning entity rather than by a mortgage on the real estate. It sits between the senior mortgage and the common equity in the capital stack.
Medical office mezzanine debt tends to accompany acquisitions of stabilized, credit-tenanted buildings where the senior lender stops short of the sponsor's target leverage.
Medical Office market context
Medical outpatient buildings have separated from traditional office fundamentals. MOB occupancy reached 92.3% by year-end 2025 compared to 80.2% for conventional office, while MOB rents rose 6.2% versus a 3.4% decline in office rents over 2023-2025. Cap rates compressed from 7.47% at end of 2024 to 6.49% at end of 2025, signaling strong institutional demand.
The demand drivers for medical office are structural rather than cyclical. An aging population, the shift from inpatient to outpatient care, and health system expansion into community-based settings all support long-term occupancy. Healthcare job postings in medical and social assistance rose from 88,630 in mid-2020 to 205,437 by mid-2025, tracking service expansion.
Underwriting considerations for medical office
H Equities recognizes medical office as a standout asset class with durable fundamentals and needs-based demand. Our approach focuses on MOBs with strong health system tenancy, proximity to hospitals and population centers, and demographic tailwinds that support long-term occupancy. For a mezzanine loan specifically, the request is evaluated against the asset-level factors below and the structural questions that follow.
- Tenant credit matters enormously: the spread between a hospital-affiliated health system lease and a small specialty practice lease can be enormous in terms of risk.
- Evaluate reimbursement and policy exposure -- healthcare economics run through Medicare/Medicaid dynamics and insurer negotiations that can impact tenant stability.
- MOB deliveries have remained relatively stable (-5.3%) compared to a 54.1% drop in traditional office deliveries, but pockets of overbuilding exist in certain markets.
- Assess proximity to hospitals, major medical centers, and population density -- these fundamentals drive patient volume and tenant demand.
- Lease structures in medical office often include higher tenant improvement allowances due to specialized build-out requirements for clinical use.
- The senior loan terms and whether the senior lender permits subordinate debt and an intercreditor agreement
- Combined leverage across senior and mezzanine positions relative to value and cost
Situations where medical office sponsors use mezzanine loans
Sponsors use mezzanine debt to close the gap between what a senior lender will advance and the total capitalization, without bringing in additional common equity partners or giving up ownership.
- Gap Financing: 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.
- Higher-Leverage Acquisitions: 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.
- Recapitalization: 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.
- Development Capital Stack Completion: Complete the capital stack for ground-up or major renovation projects where the sponsor has secured senior construction financing but needs additional subordinate capital.
Alternatives and structures nearby
Mezzanine debt sits behind the first mortgage and ahead of all equity. Where a senior lender prohibits subordinate debt, preferred equity often takes the same place in the stack.
For medical office, H Equities also publishes bridge loans, preferred equity, and co-gp equity. The right choice depends on the senior lender's requirements, the sponsor's ownership goals, and how much of the plan's value has already been created.
Risks and trade-offs
Mezzanine debt increases total leverage, so the equity cushion below it is thinner and a valuation miss reaches the mezzanine position before it reaches the senior lender. Accruing structures relieve current cash flow but grow the balance that the exit has to cover. The intercreditor agreement governs what the mezzanine lender can do in a default, and its terms matter as much as the rate.
How to start
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. For medical office, include the rent roll or sales plan, the capital budget, and the exit assumptions. H Equities responds with questions or a view on fit, not an automated decision.