Where does mezzanine debt fit in the capital stack, and what characteristic does it often have?

• 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 in the middle of the capital stack: it is subordinated to senior debt, meaning it gets paid after the senior lenders, but it has priority over equity. Because it carries more risk, it typically offers higher returns and can include features tied to ownership, such as warrants or an equity kicker, or even security tied to ownership interests in the project or entity. That combination—below senior debt, above equity, with possible ownership-related security—best matches the described statement.

Why the other descriptions don’t fit: it isn’t positioned above senior debt, so it wouldn’t be paid ahead of the primary lenders; it isn’t identical to preferred equity, since mezzanine is debt with potential equity-like features rather than actual equity; and it does not have the lowest priority—that distinction belongs to equity, not mezzanine.