Mezzanine financing, and when it is worth the cost
A gap filler for larger projects, priced for the position it occupies rather than for the property it sits behind.
The short answer
Mezzanine sits between the senior loan and your equity. It fills a gap the first lender will not fill, it costs considerably more than senior debt because it is repaid after the senior lender in every scenario, and it only makes sense when the return on the capital it unlocks exceeds what it costs.
| Position | What it does | What it costs |
|---|---|---|
| Senior debt | The main loan, first charge, lowest cost | Priced against a benchmark, the cheapest money in the stack |
| Mezzanine | Fills the gap between senior proceeds and total cost | Materially more than senior debt, because it is repaid second |
| Sponsor equity | What you put in, last to be repaid and first to absorb loss | The most expensive capital of all, which is the argument for mezzanine |
Why it exists
Every senior lender has a ceiling. On a build it is expressed as a loan to cost, on a standing asset as a loan to value, and either way the lender stops at the point where it is comfortable. That ceiling is set by the lender's own risk appetite, and it is frequently below what the project actually needs.
The gap has to be filled by somebody. Traditionally that is the sponsor, writing a larger cheque and accepting a smaller number of projects. Mezzanine is the alternative: capital that bridges the distance between senior proceeds and total cost, at a price between debt and equity. You can size the senior piece on our construction loan calculator and read how build facilities are structured on our construction financing page.
What the senior lender has to agree to
Mezzanine does not exist without the senior lender's cooperation. The first lender holds the first charge and wrote the covenants, and additional capital behind it affects both. So the two lenders negotiate terms between themselves, usually recorded in an intercreditor agreement, which sets out who gets paid in what order, what the mezzanine lender may and may not do if payments stop, whether it can cure a default, and what happens if the project has to be taken over.
That agreement is drafted between the lenders and their counsel, and it takes time. It is also where the real protections live for everyone in the stack. Which leads to the practical warning: a mezzanine offer without the senior lender's consent is not a real offer. It is an indication that becomes a deal only once the first lender signs.
The same postponement logic shows up in a simpler form when a seller carries part of the price. Our page on vendor take back mortgages walks through consent and postponement on a smaller scale.
The arithmetic that decides it
There is one honest test. Does the project's return on the incremental capital exceed the cost of that capital, including every fee attached to arranging it? If it does, mezzanine has done its job, because it let you build something with less of your own money in it and freed the rest for the next project. If it does not, you have paid a premium to reduce your own return.
Run that calculation on the increment, not on the whole project. Blending the mezzanine cost across the entire capital stack produces a comfortable average and tells you nothing. The question is what the last dollars cost and what they earn.
And the blunt corollary. If the deal only works because mezzanine got you to the finish line, the deal probably does not work. Expensive capital rescues a timing problem. It does not rescue a margin problem.
Who actually uses it
Developers on larger projects, where the senior loan to cost leaves a gap too big to fund personally. Sponsors deliberately preserving equity so the next site can be bought while this one is under construction. And owners with a timing problem rather than a value problem, where the asset is sound and the capital simply has to arrive before something else completes.
One practical point worth stating clearly. Mezzanine is a large deal tool. The arranging cost is close to fixed regardless of the amount, so it is rarely economic on small files, where a second mortgage or additional equity does the same job for far less friction. Our deal types and sizes page sets out where the practical thresholds sit on the files we take on.
Mezzanine questions.
Got a gap between senior debt and cost?
Send the budget and the senior term sheet. We will tell you whether the gap is worth filling with mezzanine or with something simpler.