Where mezzanine fits in the capital stack
A development is funded in layers. Senior debt sits at the bottom of the risk queue and is repaid first. Sponsor equity sits at the top and is repaid last. Mezzanine sits in between — repaid after the senior lender but before the sponsor sees a profit.
If senior debt covers 60% of total development cost and the sponsor has 20% equity, mezzanine can fund the missing 20% so the project can proceed.
How it is secured and priced
Mezzanine is typically secured by a second mortgage over the site, a general security agreement over the development entity, share security, and sponsor guarantees, plus a deed of priority with the senior lender. Interest is usually capitalised and repaid from settlement proceeds as stock sells.
Because the position is subordinated and dependent on the project completing and selling, mezzanine is priced well above senior debt, and some transactions include a profit-share or exit fee component.
When it makes sense — and when it does not
Mezzanine is worth it when the extra leverage lets a genuinely profitable project proceed, and the cost of the mezzanine layer is comfortably smaller than the profit it unlocks. It is dangerous when it is being used to prop up a project with thin margins, because the mezzanine layer consumes the developer's profit first if costs or sales prices move against them.
Before taking mezzanine, model the project with a 10% cost overrun and a 5% fall in realised prices. If mezzanine cannot be repaid in that scenario, the layer is too thick.
Key points
- Mezzanine is subordinated debt between senior debt and equity.
- Secured by second mortgage, GSA, share security and guarantees.
- Repaid after the senior lender, so priced materially higher.
- Only sensible where project margin comfortably absorbs the cost.
Frequently asked questions
How much of a project can mezzanine fund?
Commonly 10–25% of total development cost, taking combined leverage to around 80–90% of cost depending on the project and the senior lender's tolerance.
Does the senior lender have to agree?
Effectively yes. Mezzanine requires the senior lender's consent and typically a deed of priority governing enforcement and payment order.
Is mezzanine the same as preferred equity?
No. Mezzanine is debt with security and a contractual return; preferred equity is an equity interest with priority distributions and no mortgage.