The Same Problem, Different Solutions
Both preferred equity and mezzanine debt exist to fill the financing gap between what a senior lender will fund and the equity a sponsor wants to deploy. They sit in the same part of the capital stack but operate differently — and choosing the wrong structure can create significant friction at the wrong time.
Mezzanine Debt
Mezzanine is a loan secured by a pledge of the ownership interests (typically LLC membership interests) in the borrowing entity. Key characteristics:
- Governed by a subordination and intercreditor agreement with the senior lender
- Lender has foreclosure rights on the pledged equity — a faster remedy than real property foreclosure
- Typically priced at fixed or floating coupons ranging 9–14% depending on leverage and asset type
- Requires senior lender consent and intercreditor negotiation — can slow closings
Preferred Equity
Preferred equity is an equity investment that sits senior to the common equity within the project ownership structure. Key characteristics:
- Structured within the LLC operating agreement — not subject to intercreditor requirements
- Preferred return typically 10–15%, often with a promoted interest kicker
- Enforcement via operating agreement remedies (manager replacement, forced sale rights)
- Can be faster to close and simpler to document when senior lender prohibits mezzanine
How to Choose
The right structure depends on several factors: what your senior lender permits, your timeline, the nature of the asset, and your investor base. We help sponsors evaluate both options in the context of their specific deal — not as a generic recommendation, but with a real term sheet in hand.