Real estate investors often use the term mezzanine loan to mean different things. And the distinction between mezzanine loans and preferred equity isn't always clear. Many times investors use the terms interchangeably. Mezzanine loans and preferred equity interests are both forms of investment in commercial properties; they are favored by investors, particularly institutional investors, that want a fixed, or at least floored, return and priority as to both their return on and return of investment.

Mezzanine Debt is generally a loan that is secured by a property and senior to any equity, but junior to the senior loan on the property.

Preferred Equity, on the other hand, is an equity investment in the property-owning entity. It is not secured by the property but rather by an interest in the entity investing in (or owning) the property.

Mezzanine Debt is an effective tool to provide sponsors higher levels of leverage at less cost than pure equity. In return, investors get a higher yield for their additional risk in a subordinated position.

Preferred Equity provides a coupon return, similar to debt, and in some cases may provide the investor with upside potential, in the form of a kicker, of remaining equity.

Mezzanine debt and preferred equity can -- and often do -- have similar terms and conditions; nonetheless, institutional and other real estate investors appear generally to regard mezzanine debt as an intrinsically better form of investment than preferred equity.