Mezzanine debt

Mezzanine debt is a loan to the company that owns the property-owning company, secured by a pledge of its ownership interest. It is not a second mortgage. If it defaults, the mezzanine lender doesn’t foreclose on the building; it sells the pledged equity and, with it, control of the borrower.

What it costs in 2026

• Quotes: Altus Group’s Q2 2026 survey averaged 759 bp over the 10-year Treasury for fixed-rate mezzanine at 70% to 90% LTV, down from 787 bp in Q1 and 996 bp a year earlier. Floating mezzanine averaged 721 bp over Term SOFR.
• What holders earn: In their 10-Qs for the quarter ended June 30, 2026, Starwood Property Trust reported a 10.4% weighted-average coupon on $291.7 million of mezzanine loans, and Arbor Realty Trust an 8.01% pay rate (8.43% yield for the quarter) on $300.9 million across 61 mezzanine loans. Arbor’s sit between a 57% first-dollar and an 80% last-dollar LTV.

How it’s secured and enforced

The collateral is a membership or partnership interest. Under UCC 8-103(c), an LLC or partnership interest is not an Article 8 security unless it trades on a securities market, is an investment company security, or its terms expressly opt in. For a private property company only the last applies, which is why mezzanine lenders require the operating agreement to opt in.

On default, UCC 9-610 lets the secured party sell the collateral, but “every aspect of a disposition” must be commercially reasonable. 9-611 requires notice to the debtor and others, and under 9-612 notice sent 10 days or more before the sale is reasonable in a commercial deal. A UCC sale can happen within weeks of default, while a mortgage foreclosure in a state that requires going through court usually takes much longer. That speed is much of what the mezzanine lender bargains for.

The intercreditor agreement

The senior lender and the mezzanine lender sign an intercreditor agreement that subordinates the mezzanine loan and usually gives the mezzanine lender cure rights and an option to buy the senior loan if it defaults. Fannie Mae requires an intercreditor agreement it has approved for every loan with mezzanine financing (Multifamily Guide §1501.04). In CMBS, the BBCMS 2026-5C43 prospectus says the intercreditor “may include cure rights and a default-related repurchase option.”

When it makes sense

When you need more proceeds than the senior lender will give and don’t want to give up ownership. In the stack builder, add a mezzanine layer and watch two things: the DSCR on all debt (the mezzanine interest comes out before you see a dollar) and the common equity IRR, which rises only if the property earns more than the mezzanine costs.