Preferred Equity vs Mezzanine: Knowing the Difference
Mezzanine debt and preferred equity often sit in similar positions in a capital stack — between senior debt and common equity — and provide similar returns to providers. But structurally, they are very different, and the differences become critical when something goes wrong.
Mezzanine Is Debt
Mezz is a loan. It has a stated maturity, interest payments, and remedies for default. The mezz lender has the right to foreclose on its collateral (typically equity interests in the property entity) if the borrower defaults.
Preferred Equity Is Equity
Preferred equity is an equity interest with priority over common equity in distributions and liquidation. The provider receives a preferred return, but technically is a partner in the venture rather than a creditor.
Default and Remedies
Mezz default triggers foreclosure remedies. Preferred equity default — typically failure to pay the preferred return — usually triggers a change of control of the entity, where the preferred holder takes over decisions. The mechanics and timing are different.
Senior Lender Preferences
Most senior lenders permit preferred equity behind them with less restriction than mezz debt. Preferred equity is sometimes the only way to layer subordinate capital when the senior lender will not allow mezzanine debt.
Educational content only — not advice. KQT Advisors, LLC is a commercial loan broker; we are not a lender, attorney, accountant, financial advisor, or fiduciary. We do not originate loans or make lending decisions. The information in this article is provided strictly for general informational and educational purposes and reflects our understanding at the time of writing. It is not — and must not be construed as — financial, tax, legal, accounting, investment, or any other professional advice, and creates no advisor-client relationship. Loan programs, rates, terms, eligibility requirements, fees, and approval criteria are set by individual lenders, the SBA, and other parties and are subject to change at any time without notice. Examples are illustrative only and not guarantees of outcome. Nothing here is a commitment to lend, an offer of credit, or a representation that any specific structure will be available to or appropriate for any borrower. Always consult your own qualified financial, tax, and legal advisors before acting on any information in this article. To the maximum extent permitted by law, KQT Advisors, LLC and its principals, employees, agents, and affiliates disclaim all liability for any direct, indirect, consequential, or incidental loss or damage arising out of any use of, reliance on, or inability to use the information in this article.