Mezzanine vs Preferred — The Real Difference
Mezzanine is a loan secured by a pledge of the equity interests in the borrowing entity (not the real estate itself). It sits structurally between the senior loan and the equity, with an intercreditor agreement governing rights.
Preferred equity is technically equity — but with a fixed return (a "coupon"), liquidation priority over common equity, and often forced-sale rights if returns aren't met. It looks like debt but counts as equity for lender purposes.
When You Need Mezz or Pref
Senior debt typically caps at 65–70% LTV (or LTC for construction). Sponsors rarely have 30–35% equity sitting in cash. Mezz and preferred fill the gap — extending total proceeds to 80–90% of the stack without diluting common equity returns through additional LP capital.
The Blended Cost of Capital Equation
If senior is 65% at 6.85% and mezz is 15% at 12.5%, the blended debt cost is 7.91% — not the senior rate. Most sponsors size the senior to the LTV cap and add mezz only if the deal can absorb the blended cost while still hitting LP return targets.
Pair this with the Sources & Uses, the Waterfall / Promote, and the IRR + EM Calculator.