What is mezzanine debt and how does it differ from preferred equity in a real estate capital stack?

• A. It sits above senior debt but below equity.
• B. It sits below senior debt but above equity and may be secured by ownership interest.
• C. It is identical to preferred equity.
• D. It has the lowest priority in the capital stack.

Answer: (B)

Mezzanine debt sits between senior debt and equity in the capital stack. It takes more risk than the senior lender because it gets repaid only after the senior debt is satisfied, so it carries higher interest and often includes an equity kicker or conversion option to participate in upside. A distinctive feature is that it can be secured by ownership interests in the project, meaning the lender might have a claim on equity if the loan isn’t repaid, though many arrangements are unsecured and rely on covenants and upside incentives to justify the higher risk.

Preferred equity, by contrast, is equity, not debt. It has a priority over common equity for distributions and in liquidation, but it does not have a fixed repayment obligation like a loan, and it typically doesn’t function as a bankable debt claim on the assets. It sits above common equity but below all debt in the stack.

So the best description is that mezzanine debt sits below senior debt but above equity and may be secured by ownership interest.