Architects refer to the “mezzanine floor” in a building as the “intermediate floor” between the main levels of a building. Similar concepts apply in commercial real estate financing.
A mezzanine financing is used in certain real estate deals in order to fill the gap between the value of the principal loan and the amount of equity that can be raised.
In a real estate investment, mezzanine financing can increase returns by reducing the amount of equity needed.
There are risks associated with mezzanine financing, too. Because its high interest rates and fees increase the overall cost of capital, the property needs to be able to cover both the senior and mezzanine debts.