How is mezzanine debt priced?

Mezzanine pricing has 3 components: (1) cash coupon paid monthly (typically 8-12%), (2) PIK accrual that compounds to principal (typically 2-4%), (3) sometimes warrants or kickers at exit (1-3% IRR equivalent). Effective IRR to lender = sum of all three. Real estate mezz typically 12-15% all-in. Recap mezz 14-17%. Construction mezz 15-18%.

What is PIK in mezzanine?

PIK = Payment-In-Kind. The unpaid interest portion accrues to the principal balance and compounds. Worked example: $5M mezz at 11% cash + 3% PIK over 5 years. Cash coupon $550K/yr. PIK accrues from $150K year 1 to ~$170K year 5 (compounding). Term-end balance ~$5.85M (vs. $5M par). Effective IRR ~14% combining cash + PIK.

When do warrants make sense in mezz?

Warrants typically appear in: corporate mezz (LBO + growth equity), real estate mezz on construction or repositioning where equity-like upside justifies, sponsor-friendly structures with longer term/lower cash coupon. Warrants worth ~1-3% IRR equivalent at exit. Real estate stabilized mezz typically NO warrants, pure cash + PIK structure.

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Mezzanine Pricing Calculator

Cash coupon + PIK accrual + term + warrants → all-in effective cost + balloon balance. Real estate, corporate, recap, construction mezz scenarios.

Mezzanine Terms

Mezzanine Principal

Cash Coupon (% paid monthly)

PIK Rate (% accruing to principal)

Term (years)Warrant IRR-Equivalent at Exit (%, 0 if none)

Real estate mezz typical: 10-12% cash + 2-4% PIK + no warrants. Corporate mezz: 9-11% cash + 3-5% PIK + 1-3% warrants. Construction mezz: 11-13% cash + 3-5% PIK + 1-2% warrants.

Pricing Output

Annual Cash Coupon Payment

$550K/yr

Total Cash Paid Over Term

$2.75M

Term-End Balloon Balance (incl. PIK)

$5.80M

PIK accrued: $796K (compounds annually)

Total Cost (Cash + PIK)

$3.55M

Effective All-In Rate (Cash + PIK + Warrant)

14.00%

Vs. senior CRE debt at ~6-7%, mezz premium ~6-9 points

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