Mezzanine top-up to preserve sponsor equity

The situation

This is an anonymised composite reflecting a recurring pattern, not a specific settled transaction. A developer has senior construction finance approved for a mixed-use project at a loan-to-cost ratio that still leaves a meaningful funding gap to total project cost. The developer has other projects underway and would prefer not to tie up further personal equity in this one, even though they could technically fund the gap themselves.

Why it's hard

Contributing the full remaining equity would work, but it concentrates the developer's capital in a single project at a point where they are trying to run several developments in parallel, limiting their capacity to pursue other opportunities. At the same time, simply asking the senior lender to increase its loan-to-cost ratio is not something most senior lenders will do beyond their own policy limits.

How it can be structured

A mezzanine facility sized to bridge the specific gap between the senior construction loan and total project cost is the standard structure, ranking behind the senior lender under an intercreditor agreement that governs drawdowns and each party's rights if the project encounters difficulty; the exit is project completion and sale or refinance, with mezzanine debt repaid from proceeds after the senior facility. Preferred equity is a close alternative, structured as an investment into the project entity rather than a loan, which some developers prefer for tax or structuring reasons their accountant can advise on. Either way, the mezzanine or preferred equity provider will assess the project's feasibility and the senior lender's own terms closely, since their position is genuinely subordinate to the senior facility.

Negotiating the intercreditor agreement is typically the single item most likely to extend a mezzanine-funded project's path to financial close, since the senior lender will want strict limits on the mezzanine provider's ability to accelerate or enforce independently, while the mezzanine provider will want meaningful cure rights and visibility into the project's ongoing performance. Developers who have identified and briefed both parties on these requirements early, rather than leaving the negotiation until after each facility has been separately approved, generally reach agreement considerably faster. Some mezzanine and preferred equity providers will also want board or observer rights on the development entity, or step-in rights if the project underperforms against agreed milestones, which developers should factor into their expectations around ongoing control of the project. Where the developer has used mezzanine finance successfully on a previous project, presenting that track record, including how any issues were managed, tends to give both the senior lender and the mezzanine provider more confidence in approving a similar structure again.

What it typically costs

Mezzanine and preferred equity capital is priced above senior construction debt, reflecting its subordinated position, quoted on enquiry once a provider has reviewed the project feasibility and the senior lender's terms. The blended cost of capital across senior and mezzanine together is higher than senior debt alone, which is the trade-off for preserving the developer's own equity.

Timeline

1. Same day — scoping call confirming the senior facility's terms and the size of the funding gap.
2. 5–10 business days — mezzanine provider matching and feasibility review.
3. 10–20 business days — negotiation of the intercreditor agreement between senior and mezzanine parties.
4. 5–10 business days — documentation and financial close alongside the senior facility.

Questions we'd ask you

1. What is the exact gap between your approved senior facility and total project cost?
2. What is the developer's own equity contribution as a proportion of total cost?
3. Do you have other projects currently drawing on your available capital?
4. Has your senior lender indicated willingness to work alongside a mezzanine or preferred equity provider?
5. Would you prefer a debt structure or a preferred equity structure, and has your accountant advised on the difference for this project?⚠

Related

Mezzanine & preferred equity · Construction finance · Property developers · Intercreditor agreement