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Mezzanine Financing for Commercial Real Estate
Mezzanine financing helps increase leverage on commercial properties by inserting a layer of debt between the first mortgage loan and the owner’s equity. Mezzanine loans, which are often cheaper than equity, start at $2 million, offer up to 90% LTV, are typically interest-only, and have non-recourse options available.
Mezzanine Loans and Preferred Equity for Commercial Properties
Mezzanine financing is structured to increase leverage on commercial properties through the insertion of a layer of debt between the first mortgage loan and the owner’s equity. Mezzanine loans allow the lender to go higher on the capital stack than what traditional debt would normally allow. This makes them ideal for recapitalizations and refinancing when the current amount owed is higher than what can be obtained through conventional lenders.
Another use of mezzanine financing is offsetting investor equity, which can often be more expensive than debt. This is particularly the case when building a commercial property from the ground up. Specifically, preferred equity is available when the first lien holder won’t allow a secured second position and the mezzanine lender uses shares of the borrower/LLC as collateral instead of the underlying real estate itself.
Have questions or inquiries? Contact hello@commercialrealestate.loans to speak with a commercial mortgage broker about mezzanine financing and preferred equity.
Mezzanine Financing and Preferred Equity Terms in 2025
Minimum Loan: $2 million
Term: Coterminous with the first lien
Leverage: Up to 90% LTV on stabilized property and 85% LTC on construction
Amortization: Interest only
Recourse: Non-recourse options are available
Country club syndicates
Crowdfunding platforms
Pensions funds
Private debt funds
Debt can be expensive and drive up blended debt cost
Not allowed by all lenders
Cheaper than equity
Provides higher leverage
Interest is tax deductible
Lenders Available for Permanent Financing
Considerations for Mezzanine Debt
Though mezzanine debt is a great option for investors looking to increase leverage their leverage, some loan programs and senior lenders don’t allow it. HUD multifamily loans, for example, never permit mezzanine financing. Additionally, agency lenders such as Fannie Mae and Freddie Mac typically restrict mezzanine debt to approved sources — lending under specified guidelines. CMBS lenders do permit mezzanine debt, but typically only at their discretion. In the rare event that a senior lender does agree to permit mezzanine debt, both lenders are usually required to sign an intercreditor agreement, which governs the rules between the two parties in regards to how and when each will get paid.
In some commercial real estate deals, especially ones in which a borrower’s financials aren’t as strong, a lender may incorporate an equity kicker in exchange for reduced interest rates. An equity kicker is language found in the deal contract that provides the lender with a small piece of equity in the property as incentive, which can be extremely lucrative if the real estate market takes off and the property is sold for a large profit.
Sometimes, a borrower can avoid paying part of their interest until they actually repay their loan, by increasing the principal of the loan itself. This process is known as payment-in-kind interest, more commonly called a PIK toggle. To better illustrate how a PIK toggle works, consider a borrower with a 12% interest rate who is able to pay 10% of their interest up front and 2% on the back end. With a PIK toggle, that 2% interest is added to the principal and, while it will free up cash flow in the short run, it also increases the overall interest paid throughout the life of the loan.