What is mezzanine financing in commercial real estate?

Mezzanine financing sits between the senior (first mortgage) debt and equity in a commercial real estate capital stack. It is typically a loan secured by a pledge of the borrower's ownership interest (equity) in the property-owning entity, rather than a mortgage on the property itself. Mezzanine financing fills the gap when a property needs more leverage than the first mortgage allows — for example, when a property supports 65% LTV from a senior lender but the borrower wants 80% overall leverage. Mezzanine loans are more expensive (interest rates of 10%–20%) and riskier for the lender. They are most common in large commercial transactions and development projects.