Also known as mezzanine financing.

In corporate finance, debt that ranks in priority behind senior debt but ahead of trade creditors or equity; often unsecured, high yield, subordinated debt, and commonly convertible into equity of the borrower. This debt is typically subject to a bullet repayment and possibly prepayment premiums.

In commercial real estate finance, mezzanine debt is a source of additional financing on real estate that is already subject to a mortgage. A mezzanine loan is secured by a pledge of the equity of the entity (such as a limited liability company) that owns the mortgaged real estate. If the mezzanine borrower defaults, the mezzanine lender forecloses and becomes the new owner of the pledged entity. The pledged entity (now owned by the foreclosing mezzanine lender) remains the owner of the real estate, and the real estate remains subject to the mortgage.

Mezzanine loans are a more expensive financing source than secured debt or senior debt for a borrower in both the corporate finance and commercial real estate contexts because they are riskier to the lender.

For a visual depiction of a typical commercial real estate mezzanine loan, see Real Estate Mezzanine Lending Chart. For more information on commercial real estate mezzanine loan foreclosures, see Practice Note, Mezzanine Loan Foreclosures. For a discussion of the relationship between commercial real estate mezzanine loans and commercial mortgage-backed securities (CMBS) mortgage loans, see Practice Note, Commercial Mortgage-Backed Securities (CMBS) Finance: Overview: Relationship of CMBS Loans to Mezzanine Loans.

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