Finance question
Can I use mezzanine finance to close the equity gap on a development?
Often yes, if the project is approved, a senior lender is lined up and you still put in real equity of your own. Published lender and developer pages show mezzanine adding 10% to 20% of cost on top of a senior loan, which takes the combined debt to between 75% and 85% of cost, subject to lender assessment.
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The short answer
Mezzanine sits between the bank and your own cash
A development is normally funded in layers. The senior lender takes a first mortgage and lends the biggest share. Your equity sits at the bottom. Mezzanine is the second mortgage in the middle: it covers part of the gap when senior debt plus your cash falls short of total development cost. Because it ranks behind the bank, it is priced higher and the lender wants to see the project hold up if sales come in soft.
The numbers lenders publish are consistent enough to plan with. Senior debt from a bank is put at 60% to 70% of total development cost, and mezzanine adds 10% to 20% on top, so the combined loan to cost lands at 75% to 85%. One lender advertises up to 90% of cost, but a developer's guide notes the stack rarely goes above 85% without preferred equity. Lenders also want genuine sponsor equity of at least 10% to 15% of total development cost, so mezzanine reduces your cash, it does not replace it (mezzanine finance guide).
Size and margin decide whether anyone will look at the file. The same guide puts the minimum project at about $2m to $3m of total development cost, with most mezzanine lenders preferring $5m or more, and lender models wanting roughly 18% to 22% profit on cost. One lender states a minimum project profit of $500,000. The senior lender must also consent in writing, through a deed of priority, because mezzanine takes a second mortgage behind theirs. Ventas is a broker across 40+ lenders and is paid by the lender on settlement, with no upfront fee to you.
Do you qualify?
What mezzanine lenders ask for on a development.
An approved project
Planning approval, plans and a fixed price building contract.
Real equity in
Land at valuation plus cash, not a gap you hope the lender fills.
A margin that survives a fall
Profit on cost that still works if net sales come in 10% lower.
Senior lender consent
A signed deed of priority, plus guarantees from the sponsors.
Why developers use mezzanine
More project for less cash
The same equity can carry a larger or an extra development.
One senior bank stays in place
The senior loan is not renegotiated, mezzanine slots in behind it.
Preferred equity is the fallback
If the bank will not consent, a different layer can fill the gap.
A worked example
A developer has a $5m project with a senior offer at 65% of cost, $3.25m. Their own equity is $1m, 20% of cost, so the gap is $750,000, 15%. Mezzanine covers it and the combined loan to cost is 80%, inside the 75% to 85% range, with the equity above the 10% to 15% floor. These splits are worked from the guide's percentages. Illustrative only.
Common questions
Frequently asked questions
How much of a development can mezzanine fund?
Published pages show mezzanine adding 10% to 20% of total development cost on top of senior debt, giving a combined 75% to 85%. One lender advertises up to 90%, but the stack rarely passes 85% without preferred equity.
Do I still need my own equity?
Yes. Mezzanine lenders want at least 10% to 15% of total development cost in genuine sponsor equity, and land you already own counts at valuation.
What fees come with mezzanine finance?
Establishment fees are published at 2% to 5% of the facility, some lenders add an exit fee of 0.5% to 1.5%, and a profit share of 2% to 5% is described as typical. Legal, valuation and drawdown inspection costs are usually passed through.
What if the senior lender will not agree to a second mortgage?
The senior lender must consent to mezzanine through a deed of priority. If it will not, preferred equity, which needs no second mortgage, is the usual alternative.