What Is a Mezzanine Loan?

Imagine your company’s financing as a layer cake. The bottom layer (senior debt) is sturdy and cheap. The top layer (equity) is flexible
but expensive because you’re giving up ownership. A mezzanine loan is the delicious middle layersweet, pricey, and
strategically placedused when senior lenders won’t (or can’t) lend more, but you’d rather not hand over a bigger slice of your company.

In plain American English: a mezzanine loan is in-between capital that blends features of debt and equity. It usually sits
below senior debt (meaning it gets paid later if things go sideways) and above equity (meaning it gets
paid before owners). That “middle child” position is exactly why it’s called mezzanine.

Mezzanine Loan Definition (No Jargon, Promise)

A mezzanine loan is financing that fills the gap between what a senior lender will provide and what the borrower needs to
complete a dealoften an acquisition, expansion, recapitalization, or a large commercial real estate project.

Mezzanine loans are typically:

• Subordinated to senior loans (paid after the senior lender).
• Higher interest than senior debt (because the risk is higher).
• More flexible than many bank loans (often interest-only with a “bullet” principal repayment at maturity).
• Sometimes paired with an equity kicker (like warrants or conversion rights) that gives the lender upside if the company
  performs well.

Where a Mezzanine Loan Sits in the Capital Stack

The “capital stack” is the pecking order of who gets paid first. Mezzanine financing is typically positioned like this:

1. Senior secured debt (first in line)
2. Mezzanine debt (middle of the stack)
3. Preferred equity (varies by structure)
4. Common equity (last in line, but with the most upside)

This ranking matters because it drives pricing. Senior lenders accept lower returns because they have stronger protections. Mezzanine lenders
take more risk, so they expect higher returnsand they usually negotiate terms that give them control levers if performance slips.

How Mezzanine Loans Work

1) The core idea: “Here’s extra capital… but it isn’t cheap.”

Mezzanine financing is most common when a deal is already “maxed out” on senior debt. A senior lender might be comfortable lending up to a
certain leverage level based on cash flow, collateral value, or loan-to-value constraints. If the borrower needs more capital, mezzanine can
bridge the shortfall without requiring the borrower to sell as much equity.

2) Repayment structure: interest now, principal later

Many mezzanine loans are structured as interest-only with a balloon (“bullet”) payment of principal at the end.
This can be attractive because it preserves cash in the early yearsespecially useful after an acquisition when you’re integrating operations
(or after a real estate purchase when you’re stabilizing occupancy).

3) Cash interest, PIK interest, and “the toggle”

Mezzanine loans may require:

• Cash-pay interest: you pay interest regularly in cash.
• PIK (Payment-in-Kind) interest: interest accrues and is added to the principal balance instead of being paid in cash.
• PIK toggle: the borrower may choose (or be forced) to switch some interest from cash-pay to PIK under certain conditions.

PIK can be a lifesaver for liquidity, but it’s not a free lunchit compounds, raising the payoff amount at maturity.

4) Equity kickers: the lender wants some upside, too

Because mezzanine is riskier than senior debt, lenders often seek a little extra reward through an equity kicker, such as:

• Warrants (the right to buy equity at a set price)
• Conversion features (debt converts to equity under agreed terms)
• Profit participation or success fees (less common, but it happens)

Mezzanine Loan vs. Similar Financing (So You Don’t Mix Up the Acronyms)

Mezzanine Loan vs. Subordinated Debt

Subordinated debt is a broad category: debt that ranks behind senior obligations. Mezzanine debt is usually subordinated, but it often includes
more “equity-like” featuresespecially warrants, convertibility, or looser amortization schedules.

Mezzanine Loan vs. Second-Lien Loan

A second-lien loan is secured by collateral with a second-priority claim (after the first-lien lender). It can function like mezzanine in the
stack, but mezzanine is often unsecured in corporate dealsor secured differently (see real estate mezz below).

Mezzanine Loan vs. Preferred Equity

In some transactionsespecially real estatewhat people call “mezzanine” might actually be structured as preferred equity.
Preferred equity can behave like debt (fixed return, priority over common equity), but legally it’s ownership interest, not a loan. The structure
affects control rights, accounting, taxes, and remedies in a default.

Mezzanine Loans in Commercial Real Estate (A Special Flavor)

In commercial real estate, mezzanine loans often have a distinct structure: the mezzanine borrower may not own the building directly. Instead,
it owns equity interests in the entity that owns the property. The mezzanine lender typically takes a pledge of those equity
interests as collateral.

Why does that matter? Because enforcement can look different than a traditional mortgage foreclosure. Instead of foreclosing on the real estate,
the mezzanine lender may enforce its security interest in the pledged equityoften under the Uniform Commercial Code (UCC).

Typical Mezzanine Loan Terms (What You’ll Usually See)

Interest rate (and why it can make you blink twice)

Mezzanine loans are generally more expensive than senior debt. Rates vary widely based on risk, leverage, industry, and deal structure. It’s not
unusual to see double-digit pricing, with combinations of cash-pay interest, PIK interest, and fees.

Maturity

Mezzanine financing commonly runs on a medium-term timeline (often several years), giving the borrower time to grow cash flow, integrate an
acquisition, or stabilize an assetthen refinance or exit.

Covenants and reporting

Expect some rules. Mezz lenders often require:

• Minimum financial performance thresholds (like leverage or coverage ratios)
• Limits on additional debt
• Restrictions on dividends or distributions
• Regular financial reporting (sometimes monthly)

Intercreditor agreement (especially when senior debt is involved)

When there’s a senior lender and a mezz lender, the relationship is often governed by an intercreditor agreementa document that
sets priorities, notice requirements, cure rights, and who can do what (and when) if the borrower defaults. This agreement can be as important
as the loan itself, because it defines how “subordinated” really behaves in real life.

Why Companies Use Mezzanine Loans

Mezzanine financing is popular for one big reason: it can provide meaningful capital while limiting ownership dilution. Common use cases include:

Funding acquisitions

When a company buys a competitor, senior lenders may cap their loan amount based on the combined company’s cash flow. Mezzanine can fill the gap,
enabling the acquisition without asking owners to write a massive equity check.

Growth capital

Expanding to new locations, launching new product lines, building inventory, or scaling operations can strain cash. Mezzanine financing can fund
growth initiatives when bank borrowing is limited.

Recapitalizations and shareholder liquidity

Sometimes owners want to take some chips off the tablewithout selling the company. A mezzanine loan can support a dividend recap or partial
liquidity event (though the company must still support the debt load afterward).

Real-World Examples (With Numbers)

Example 1: Middle-market acquisition

Let’s say a manufacturing company buys a competitor for $100 million.

• $60 million senior term loan (lower rate, strong collateral)
• $15 million mezzanine loan (higher rate, flexible repayment)
• $25 million equity (owners and/or private equity)

Without mezzanine financing, the buyer might have needed $40 million in equity instead of $25 million. The mezz layer reduces equity required,
but adds a higher-cost tranche that needs to be refinanced, paid off, or managed carefully.

Example 2: Commercial real estate purchase

A sponsor buys an office property for $50 million and needs financing:

• $32.5 million senior mortgage (65% loan-to-value)
• $5 million mezzanine loan (secured by equity pledge)
• $12.5 million sponsor equity

The mezzanine loan increases buying power and reduces the sponsor’s cash requirementhelpful if the sponsor is juggling multiple projects. But
it also increases the project’s “must-hit” performance targets (leasing, NOI growth, etc.) because the capital stack is now heavier.

Pros and Cons of Mezzanine Loans

Benefits for borrowers

• Less dilution than raising the same amount in equity
• More capital to complete acquisitions or growth plans
• Flexible structures (interest-only periods, PIK components, bullet maturities)
• Speed in many private credit transactions vs. slower traditional lending processes

Tradeoffs for borrowers

• Higher cost than senior debt
• Refinancing risk (large principal payment at maturity)
• More scrutiny (reporting, covenants, and lender oversight)
• Potential dilution if there’s an equity kicker

Why lenders like mezzanine

• Higher yields than senior lending
• Positioned above equity in the repayment order
• Potential upside through warrants or conversion
• Negotiated protections via covenants and intercreditor rights

How to Tell If a Mezzanine Loan Makes Sense

Mezzanine financing can be smart when it’s used to support a plan that reliably increases cash flow, value, or both. It’s usually a bad idea when
it’s used to paper over weak fundamentals. Before you consider mezzanine debt, ask:

• Is the business or asset stable enough to carry a higher-cost layer of capital?
• What’s the payoff plan? Refinance, sale, cash flow amortization, or a scheduled exit?
• What happens in a downside scenario? Could you still comply with covenants?
• How much dilution are you avoidingand is the interest cost worth it?

If your “repayment strategy” is basically good vibes and a spreadsheet that only goes up, pause. Mezzanine lenders can be supportive
partnersbut they are not donating money. They’re pricing risk, and they expect you to plan for reality, not just optimism.

What Lenders Typically Look For

While every lender has a different playbook, mezzanine providers commonly focus on:

• Predictable cash flow (or a credible path to it)
• Strong management and a clear business plan
• Defensible margins and competitive positioning
• Asset coverage or enterprise value that supports the stack
• A realistic exit/refinance timeline

FAQs About Mezzanine Loans

Is a mezzanine loan secured?

In corporate deals, mezzanine financing is often unsecured and relies heavily on cash flow, covenants, and structural protections. In commercial
real estate, mezzanine loans are commonly secured by a pledge of equity interests in the property-owning entity.

Are mezzanine loans risky?

They can be. Because mezzanine debt is subordinate to senior debt, it is higher risk than senior lending. That’s also why the pricing is higher.
The risk is most manageable when the borrower has solid cash flow and a well-defined payoff plan.

Do mezzanine loans affect ownership?

They can. If the mezzanine lender receives warrants or conversion rights, the borrower may experience some dilution. Even without formal dilution,
mezzanine agreements can include control rights if performance deteriorates.

Real-World Experiences Related to Mezzanine Loans (The Part People Don’t Put in the Pitch Deck)

If you ask founders, CFOs, real estate sponsors, and deal lawyers what mezzanine financing feels like, you’ll hear the same theme:
it’s simultaneously empowering and intenselike upgrading from “economy” to “business class,” but discovering the seat comes with a homework
assignment.

The first common experience is the moment mezzanine becomes “real”: when your senior lender says some variation of,
“We love the deal… and we’re done at this number.” That’s usually not a personal insultit’s a risk limit. Mezzanine steps in as the bridge
between what the bank will do and what the transaction needs. Borrowers often describe this stage as relief mixed with sticker shock.
Yes, the capital is available. No, it does not come with a bargain-bin interest rate.

Next comes the term-sheet whiplash. Mezzanine proposals can differ wildly: some emphasize cash interest, some push more PIK,
some include warrants, and some have tight covenants paired with “helpful” flexibility in other areas. A typical borrower experience here is
learning that price isn’t just a single numberit’s a bundle: cash rate, PIK rate, upfront fees, exit fees, call protection, reporting burden,
and the subtle (but meaningful) question of how quickly the lender can pull levers if performance slips. Many teams end up building a “true cost”
model to compare offers apples-to-apples.

Then there’s the intercreditor agreement reality check. Borrowers are often surprised by how much negotiation happens between
lenders, not just between borrower and lender. Senior lenders want clear priority and stability. Mezzanine lenders want enough rights to protect
their investment. The borrower experiences this as a high-stakes choreography: notices, cure periods, standstill provisions, and who can do what
in a default. In real estate mezzanine deals, borrowers also learn that the collateral story is differentbecause the mezz lender may be focused
on the equity pledge and UCC remedies rather than the dirt and bricks themselves.

Once the deal closes, the experience shifts from “raise capital” to live with the capital. Mezzanine financing tends to come
with more frequent reporting and performance monitoring than borrowers are used to with a plain-vanilla bank loan. Some companies actually like
this: it forces discipline, improves forecasting, and adds accountability. Others find it stressfulespecially if management already feels like
they’re sprinting to integrate an acquisition or stabilize a property. A common lesson here: mezzanine capital is best paired with strong
internal reporting systems. If your monthly close is chaotic, a mezz lender won’t magically make it calm.

Another widely reported experience is the refinance clock. Because mezzanine debt often has a bullet maturity, borrowers feel a
“countdown” in the background. The smartest users of mezzanine loans treat the payoff like a project that starts immediately: improve cash flow,
strengthen credit metrics, increase valuation, and create refinancing options well before maturity. The rougher experiences happen when a company
assumes refinancing will be easythen hits a tougher rate environment, weaker-than-expected performance, or a market slowdown. In those moments,
mezzanine can go from “bridge” to “pressure cooker,” because the loan still has to be addressed.

Finally, there’s the most underrated experience: mezzanine can be a confidence amplifier. When used correctly, it can help a
business win an acquisition, accelerate expansion, or complete a project that would otherwise stall. Many borrowers describe the best mezzanine
relationships as transparent and pragmaticlenders who price risk fairly, understand the business model, and stay constructive when conditions
get bumpy. The takeaway from real-world users is not “mezzanine is good” or “mezzanine is bad.” It’s “mezzanine is powerful.” And powerful tools
work best in steady handswith a clear plan, sober assumptions, and enough runway to land the plane.

Conclusion

A mezzanine loan can be a smart way to fund growth, acquisitions, or real estate projects when senior debt alone isn’t enough and you want to
avoid heavy equity dilution. The tradeoff is cost and complexity: higher pricing, tighter monitoring, and a payoff plan that needs to be real,
not wishful. Used thoughtfully, mezzanine financing is the bridge that gets you to the next level. Used carelessly, it’s an expensive reminder
that the middle layer of the cake still has calories.