FINANCING GUIDE
Preferred Equity vs Mezzanine Debt
Preferred equity and mezzanine debt both sit between senior debt and common equity but differ in legal form, remedies and return structure.
In this guideWhat the analysis measuresCalculation frameworkUnderwriting reviewHow to use the result
What the analysis measures
Mezzanine debt is a contractual claim with interest and maturity. Preferred equity is an ownership interest with priority distributions and negotiated control rights.
Calculation framework
Compare current pay, PIK or preferred accrual, fees, participation, maturity, enforcement and intercreditor restrictions rather than headline rate alone.
Underwriting review
Model downside recovery after senior debt. A stated return is not a realized return when asset proceeds are insufficient.
How to use the result
Choose the structure that fits legal, tax, covenant and governance requirements. Both increase common-equity risk and reduce residual upside.