What differentiates a mezzanine loan from a senior loan?

A mezzanine loan is distinguished from a senior loan primarily because it is typically structured as a second lien, meaning it is subordinate to the senior loan. In the hierarchy of a borrowing structure, a senior loan has the first claim on collateral in the event of default. This subordination means that mezzanine lenders have a higher risk than senior lenders, as they would only recover their investment after all senior debt has been satisfied.

Additionally, mezzanine loans often carry higher interest rates compared to senior loans to compensate for the increased risk associated with being lower in the capital structure during repayment scenarios. While it could be argued that multiple liens and secured positions exist in broader financing arrangements, the key unique feature that sets mezzanine loans apart is the junior status they hold compared to senior loans. This crucial detail helps in understanding how different levels of debt interact and the implications for lenders and borrowers in real estate financing.