Mezzanine Debt, Preferred Equity, and Global Debt Yield Calculations
Calculate senior and combined-debt yields while distinguishing mezzanine debt from preferred equity and contractual financing restrictions.
Senior debt yield divides qualifying annual income by the senior loan. A combined-debt yield divides that income by the debt included in the stated analysis, such as senior plus mezzanine debt. Define the denominator explicitly. Preferred equity is not automatically debt and should not be silently included in a metric labeled debt yield.
Identify each layer
| Layer | What to verify |
|---|---|
| Senior mortgage | Balance, security, payments, covenants and permitted subordinate financing |
| Mezzanine debt | Borrower, pledged collateral, payment terms and intercreditor restrictions |
| Preferred equity | Distribution, accrual, redemption and control provisions in the equity documents |
| Common equity | Residual distributions and losses after contractual priorities |
Actual priority, remedies and control depend on the agreements. Avoid assuming that a simple capital-stack diagram resolves legal rights or permits an additional financing layer.
A hypothetical calculation
Assume $1.2 million of qualifying annual income, a $10 million senior mortgage and $3 million of mezzanine debt.
Senior debt yield = $1,200,000 / $10,000,000 = 12.00%
Combined-debt yield = $1,200,000 / $13,000,000 = 9.23%
The extra debt lowers the combined ratio while leaving the senior ratio unchanged. Neither result establishes approval or payment coverage. To assess coverage, model the payment obligations of each layer, including any accrued amounts that become due later.
Size against a stated assumption
If a hypothetical quote uses an 8% combined-debt target, $1.2 million of income supports $15 million under that test. After the $10 million senior loan, the modeled remaining capacity is $5 million.
A $6 million mezzanine request would produce $16 million of combined debt and 7.5% combined-debt yield, below the assumed target. Other limits, senior-lender consent, intercreditor conditions and cash-flow tests can reduce or eliminate the modeled capacity. The 8% target is illustrative, not a market floor.
Treat preferred equity separately
Suppose the $3 million layer is preferred equity instead. The legal debt denominator may remain $10 million. An analyst may also show income divided by $13 million of combined senior debt and preferred capital, but must label that broader measure and explain the inclusion.
Model preferred distributions, accruals and redemption obligations separately. Calling an instrument equity does not make its cash demands disappear, while calling it debt in a calculator does not change its legal form.
Use the LTV versus CLTV guide for collateral-leverage definitions, the DSCR guide for payment coverage and the cash-management guide for distribution restrictions. Obtain document-specific advice on security, remedies and intercreditor rights; this example establishes arithmetic only.
Ready to run the numbers?
Get your result instantly — private, in your browser.