Mezzanine debt is a loan on a property project that ranks behind the senior loan and ahead of the sponsor's equity: it is repaid after the senior lender and before the developer sees any return. It lets a sponsor put less of their own money into a scheme, and it costs more than senior debt because a loss reaches it sooner. Here is where the layer sits, how it is secured, what it costs, and when it is the right tool.
Three layers, one order of repayment
Take an illustrative scheme costing CHF 20'000'000. A senior lender advances 60% of the cost, CHF 12'000'000, secured by a first-rank mortgage. A mezzanine facility adds 15%, CHF 3'000'000, and the developer puts in the remaining CHF 5'000'000. Total borrowing is then 75% of cost, of which only the bottom 60% is senior.
The order matters when something goes wrong. If the finished scheme sells for less than planned, the developer's CHF 5'000'000 absorbs the shortfall first. Only once it is used up does the loss reach the mezzanine tranche, and only once that tranche is gone does it reach the senior loan. So the mezzanine investor is protected by the equity beneath it and exposed before the senior lender above it, which is the whole case for its higher price.
How much senior lenders will advance sets how large that middle layer has to be. In the UK, Bayes Business School's survey of lenders, published on 1 November 2026, found 69% of loans in their books sitting below 70% loan-to-value. A scheme that needs more leverage than the senior market writes has to find the rest from equity or from a junior layer.
Secured behind the senior loan
The first-rank mortgage belongs to the senior lender, so a mezzanine facility takes its security further back: a second-rank mortgage on the property, a pledge over the shares of the company that owns it, or both, often with a personal guarantee from the sponsor where the deal supports it.
In Switzerland the register makes the position precise. Under article 813 of the Civil Code a mortgage is confined to the rank stated in its entry, and a second-rank entry must state the amount that ranks ahead of it. Article 814 adds that deleting a higher-ranking mortgage does not move the lower ones up; the owner may register a new mortgage in the vacant place. A Swiss mezzanine investor therefore knows the exact sum standing in front, and cannot count on climbing the queue when the senior loan is repaid. We set out how that queue forms in our first-rank mortgage explainer.
A share pledge works differently. It is a claim over the company that owns the property, so on enforcement the investor can take control of that company, and with it the asset, instead of waiting for the property to be sold. Which route is faster depends on the jurisdiction and on what the senior lender has agreed to.
That agreement is the intercreditor agreement, signed between the senior and mezzanine creditors. It fixes who is paid when, what each party may do if the project stalls, and how long the junior side must wait before acting. For a mezzanine investor the wording of that document often matters as much as the security itself.
What it costs, and when it fits
Mezzanine is priced for its rank: above the senior loan, because it carries the second loss, and below what the sponsor expects to earn on equity, because it still ranks ahead of it. The sponsor pays more per franc borrowed and in return keeps capital free.
That trade suits a sound scheme whose senior loan stops short. A developer may want equity held back for the next site, a cost increase during the build may need covering without reopening the senior facility, or a purchase may have to close before more equity can be raised. In each case the test is the same: the scheme's margin has to carry the extra cost with room left at the exit.
It fails where that room is missing. Stacking mezzanine on a thin margin raises total leverage until a modest fall in sales values wipes out the equity and reaches the junior tranche. Loan-to-value read on the senior loan alone hides this; the figure that counts for the mezzanine investor is the total, both layers together, set against a valuation it can trust (more on that in our loan-to-value explainer).
Where it sits in the diligence
A mezzanine file runs through the same nine steps as any other, with two of them doing more work. Security package design (step 5) settles the rank, the share pledge and the guarantees alongside the senior lender's own package. The conditions precedent list then carries the signed intercreditor agreement, so the order of repayment is fixed in writing before the investors fund.
Where Watson AM fits
We arrange mezzanine facilities across Europe as one of six structures for borrowers: we work out where the tranche fits, structure it alongside the senior facility, prepare the file and present it to the investors in our network it suits. Each of them makes its own assessment and the funding decision. Facilities sit inside our deal box of EUR 1M to EUR 50M+, for terms of 6 to 72 months, with indicative terms within 72 hours of a complete enquiry.
None of our twelve published case files is a mezzanine deal, so there is no file of ours to point to here; our mezzanine finance page sets out how we approach the structure. Investor and borrower material is available on request.
Common questions
What is mezzanine debt?
Mezzanine debt is a loan on a property project that ranks behind the senior loan and ahead of the sponsor's equity. It is repaid after the senior lender and before the developer sees a return, so it lets a sponsor put less of their own money into a scheme, and it costs more than senior debt because a loss reaches it sooner.
How is mezzanine debt secured?
Behind the senior lender, which holds the first-rank mortgage. A mezzanine facility is commonly secured by a second-rank mortgage, a pledge over the shares of the company that owns the property, or both, with an intercreditor agreement fixing the order of repayment. In Switzerland a second-rank entry must state the amount ranking ahead of it (Civil Code, article 813).
Why does mezzanine debt cost more than a senior loan?
Because it carries the second loss. If a scheme sells below plan, the developer's equity absorbs the shortfall first and the mezzanine tranche next, before the senior loan is touched. The investor is paid for that exposure, and the sponsor accepts the price in exchange for putting in less equity.
Watson AM, Basel. This article is general market commentary for professional and qualified investors and for real-estate developers. It isn't investment, legal, or tax advice, or an offer of any financial product.
Sources
- Swiss Civil Code (ZGB) of 10 December 1907, articles 813 and 814, on the fixed rank of a mortgage, entries in second or lower rank, and vacant ranks. fedlex.admin.ch.
- Bayes Business School (City St George’s, University of London), “UK commercial property lending jumps 29% as borrowers race to refinance”, 1 November 2026, on the H1 2026 UK Commercial Real Estate Lending Report (69% of loans in lenders’ books below 70% loan-to-value). bayes.citystgeorges.ac.uk.