What financial structure usually acts as a buffer between mezzanine debt and common equity?

The financial structure that typically acts as a buffer between mezzanine debt and common equity is the preferred equity position. Preferred equity can be considered a hybrid of debt and equity, as it has characteristics of both. It provides investors with a fixed income stream, similar to debt, through preferred dividends, while also retaining some aspects of equity ownership.

In the context of a capital stack, preferred equity sits above common equity but below mezzanine debt, creating a layer of security for mezzanine lenders. This positioning helps to mitigate the risk for mezzanine debt holders, as preferred equity holders generally have priority over common equity holders in terms of dividend payments and liquidation preference. Therefore, when the project generates cash flows or faces liquidation events, preferred equity holders are compensated before any distributions are made to common equity holders.

This hierarchy is crucial for investors assessing the risk and return profile within a real estate investment structure. It enables mezzanine debt to be structured with less risk, thus making it a more attractive option for lenders, while also providing equity-like returns for preferred equity investors.