Money & Finance › Commercial real estate lending › The capital stack: who gets paid first in a property deal
Mezzanine loans secured by the owner's LLC interests
· Asset or instrument
Fact, law or dataA rule, statute, definition or measured number.
A loan to the parent of the property-owning LLC, secured by a pledge of the LLC's ownership interests rather than by the building.
See it on the Money & Finance map →How it works
Senior lenders usually forbid a second mortgage, so the mezzanine lender lends to the parent company and takes a pledge of the LLC interests. If the borrower defaults, it can seize the LLC through a UCC Article 9 sale, often in 30–60 days, far faster than a foreclosure, and step in as owner, still owing the senior loan. Mezz typically fills the gap from about 60–65% to 75–80% of value, at roughly 10–15% interest (recent years). An intercreditor agreement sets the rules.
Why it matters
It lets an owner borrow more without a second lien, but it is costly, and a mezz lender can take over the building much faster than a mortgage lender can.
Facts, rules and data
UCC Article 9, standard intercreditor agreements used in CMBS deals since the 2000s, and court rulings on mezz foreclosures, notably New York cases in 2020–21.
Debates and risks
Courts have split over how 'commercially reasonable' a fast UCC sale must be, especially for sales held during the 2020 pandemic.
Connections (3)
▸Mezzanine loans secured by the owner's LLC interests are subordinate to Senior debt: the first-lien mortgage, paid firstFact, law or data
The connection
The mezz lender is paid only after the senior loan's interest and principal. An intercreditor agreement sets the terms: the mezz lender can cure senior defaults, buy the senior loan at par, and foreclose on the LLC interests, but only if it, or a 'qualified transferee', takes over and keeps the senior loan in place.
When and why
Common in large CMBS and bank deals since the late 1990s; standard intercreditor forms date from the 2000s.
How we know
Intercreditor agreements and court decisions on them, including the 2010 fights among Stuyvesant Town's senior and mezzanine lenders.
Debates and risks
Lawyers still argue over when a senior lender can block a mezz foreclosure and what counts as a 'qualified transferee'.
▸Mezzanine loans secured by the owner's LLC interests are a staple of Private credit fundsFact, law or data
The connection
Banks rarely hold mezzanine loans because capital rules treat them as risky. Private credit funds, insurers and mortgage REITs, with lighter rules and an appetite for higher yields, became the main mezz lenders, earning roughly 10–15% for the slice just below the senior loan.
When and why
Large managers such as Blackstone, Apollo, Ares, KKR and Starwood, especially since about 2010 as bank rules tightened.
How we know
Fund and mortgage REIT filings list mezz holdings; industry surveys track private real estate debt fundraising.
Debates and risks
With private credit at roughly $1.5–2 trillion worldwide (2024–25, estimates vary), regulators debate whether its lightly disclosed loans, mezz included, hide risks.
▸Preferred equity: paid after the lenders, before the sponsor is the equity-side twin of Mezzanine loans secured by the owner's LLC interestsMainstream view
The connection
Both fill the same gap between the senior loan and the sponsor's cash, at similar costs of roughly 10–15%. Mezz is a loan secured by a pledge of the LLC interests and enforced by a UCC sale; pref is an ownership stake enforced through the operating agreement, by removing the sponsor. Senior lenders that forbid more debt often permit pref.
When and why
Across US commercial real estate, especially in refinancings since 2022 where an owner must fill a gap without adding debt.
How solid is the link?
Intercreditor and recognition agreements, joint-venture operating agreements, and debt-fund materials that quote both products side by side.
Debates and risks
Whether 'hard' preferred equity should count as debt for loan covenants and in bankruptcy is contested, so the twins are not treated alike everywhere.