Preferred Equity vs. Mezzanine Debt

Mezzanine debt and preferred equity are often used interchangeably in casual conversation but they behave very differently in real transactions. The right choice almost always comes down to senior-lender intercreditor friction, total leverage targets, and how the parties want to handle remedies.

Mezzanine debt

Mezzanine debt sits behind senior debt and is secured by an equity pledge in the borrower entity. Senior lenders generally accept it through an intercreditor agreement that defines cure rights and standstill periods.

Preferred equity

Preferred equity is structurally equity, with a fixed coupon and priority on distributions and capital return. Because it does not require an intercreditor with the senior lender, it is often the cleaner path when the senior is sensitive to additional debt.