Modeling Mezzanine Debt

Sounds like you’re asking from the perspective of the equity investor. So first, make sure you read our blog on the capital stack, with focus on seniority. I just want to be clear that mezzanine debt is by no means equity, it is just a subordinate tranche of debt. So when a real estate private equity firm raises mezzanine debt, they are giving up no control of their equity stake. They’re just adding a slice of the capital stack between themselves and the senior debt.

On modeling mezzanine from the REPE perspective, again, it’s just another piece of debt. So you can just show an additional line for the incremental amortization and the incremental interest expense.

LTV

Typical LTV for senior debt goes up to ~50 to ~60%. So, mezzanine debt then fills in anywhere from 60% to 80%. However, a lot of REPE funds’ LP agreements cap fund leverage around ~70%, so you’ll only see mezz filling in that final slice between 50%/60% up until 70%. Anything after that LTV is usually structured as preferred equity, but then you’re really getting aggressive with your financing.

Rates

On rates, this really depends on market conditions. I’d recommend checking Bloomberg / SNL for recent issuance if you have a subscription, or a free alternative if not. Otherwise company filings can be helpful too. If it’s any help, I’ve seen the same core building’s mortgage price ~L+2.30% and its mezz price ~L+5.25%. So you can see some healthy spreads between the two, often more drastic than that.