Mezzanine Loans and Preferred Equity are both forms of investment in commercial real estate. The difference between Mezzanine Loans and Preferred Equity isn't always clear, and many times, Investors use the terms interchangeably. Both forms of investments are favored by investors, particularly investors looking for a fixed or floored return, and also priority on their return of investment.




Mezzanine Debt




This is generally a loan secured by a property (indirectly) by a pledge of the equity in the entity (usually an LLC or LP) that owns the property. It is senior to any common equity, but junior to the senior loan.




Mezzanine Debt is an effective tool that provide sponsors with higher levels of leverage at less cost than common, or Preferred Equity. In return, Mezz Investors get a higher yield because of the additional risk there are taking by been subordinated to a Senior Loan.




Preferred equity




It usually takes the form of a direct equity investment in the property. Preferred equity can be structured in many different ways, but it usually involves a fixed rate, a preferred return and sometimes an upside coupon that is typically paid upon a capital event (sale or refinance).




Preferred Equity Investors are paid before the common equity but after the Senior Lender. Since Preferred Equity is junior to the Senior Lender, it carries a higher degree of risk and warrants a higher rate of return than the interest rate charged by Senior Lenders.




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