Which describes the role of mezzanine debt in the capital stack?

• A. Mezzanine debt sits between senior debt and equity and may have the right to foreclose on equity if necessary
• B. Mezzanine debt has priority over senior debt
• C. Mezzanine debt is the same as common equity
• D. Mezzanine debt is not used in real estate financing

Answer: (A)

In real estate finance, the capital stack is ordered by priority of claims. Mezzanine debt sits between senior debt and equity, providing additional leverage beyond the senior loan but with higher risk and return. Because it is subordinated to the senior lender, the mezzanine lender is closer to equity in priority. A distinctive feature is that the mezzanine lender often has the right to convert to equity or to foreclose on the sponsor’s ownership interests if the loan defaults, effectively taking an equity stake in the project rather than seizing the property itself. This structure explains why mezzanine debt is described as being between senior debt and equity and having the potential to foreclose on equity if necessary.

The other statements don’t fit because: it does not have priority over senior debt; it is not the same as common equity; and it is indeed used in real estate financing as a way to bridge funding gaps.