Ownership & finance
Mezzanine debt
Also written: mezz debt
What Mezzanine debt means
A subordinated hybrid financing instrument that sits between senior bank debt and equity in a hotel's capital stack. It is secured by a pledge of ownership interests rather than real property, offering higher yields to lenders in exchange for taking secondary risk.
How it is used
Hotel developers and buyers use mezzanine debt to fill funding gaps when senior lenders cap their loan-to-value ratios at 60-65%. It allows owners to minimize equity dilution while achieving higher leverage, typically up to 75-80% total LTV. Because interest rates are elevated (often 9-14%), revenue managers and asset managers must drive sufficient net operating income to maintain debt service coverage ratios across both debt tranches. In default scenarios, mezzanine lenders can execute an expedited foreclosure on equity interests to take control of the property.
Worked example
An investor acquiring a $50 million hotel secures a senior bank loan for $30 million (60% LTV) at 6% interest and $10 million in mezzanine debt (20% LTV) at 11% interest. The remaining $10 million (20%) is funded through common equity. The mezzanine debt blended the capital cost, allowing the investor to complete the acquisition with only $10 million of equity instead of $20 million.
Common mistake
Borrowers often overlook the strict intercreditor agreement terms, which allow the senior lender to block payments to the mezzanine lender during a senior default, triggering a rapid equity takeover.