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Mezzanine financing is a hybrid of debt and equity used in real estate capital stacks to fill the gap between senior debt (e.g. a mortgage) and the common equity investment. It is subordinate to the primary mortgage – meaning the mezzanine lender’s claim is second to the senior lender – but has priority over pure equity. Typically, mezzanine loans are unsecured or secured by an equity pledge (rather than a direct lien on the property) and carry higher interest rates (often around 9– 20% annually in real estate contexts) to compensate for this higher risk. For example, a developer might use a mezzanine loan to raise additional capital for a project that the bank loan doesn’t cover, thereby reducing the amount of equity needed. High-net-worth investors should understand that if a project employs mezzanine financing, the deal is more leveraged: this can amplify returns in success but also increases risk – as mezzanine lenders must be paid before common equity investors receive profits. In some cases, HNW investors themselves invest in mezzanine or preferred equity positions to earn a fixed return; Lightstone might use preferred equity (akin to mezzanine in priority) in certain structures to offer investors a steady yield that’s senior to common equity, aligning with its focus on income-oriented opportunities alongside growth.
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