What is Mezzanine Finance? Bridging the Gap in Property Development

Funding a property project typically involves a three-layer capital stack: senior debt, equity, and mezzanine finance.

Mezzanine finance is a powerful hybrid of debt and equity, sitting between these two layers. While it's more complex than traditional lending, it offers flexible capital for developers and higher returns for lenders, albeit with increased risk.

In today's challenging market, traditional funding often falls short. Developers face persistent pressures from rising material costs and fluctuating workloads, making comprehensive project finance critical.

That’s where mezzanine finance comes in: it bridges the gap between what a senior lender will offer and the equity a borrower can contribute.

In this article, you'll learn:

• What mezzanine finance is and its place in the capital stack.
• Key differences between mezzanine and bridging finance.
• Real-world examples of how mezzanine loans work.
• The pros and cons of mezzanine funding.
• When it’s the right solution for your project.
  
  

We'll also show how comparison platforms like Brickflow can help you source senior debt and mezzanine finance from a wide panel of lenders, making it easier to complete your capital stack with confidence.

What is Mezzanine Finance?

Mezzanine finance is a hybrid funding solution blending characteristics of both debt and equity. It sits between senior debt (like a mortgage or commercial loan) and equity (the developer’s or investor’s own capital) in the capital stack. This is why it’s called "mezzanine," meaning "middle."

This structure is particularly useful when a project faces a funding gap. For example, if a senior lender won't cover a development’s full cost, and the developer wants to limit additional equity, mezzanine finance can bridge the shortfall.

This scenario is increasingly common. Recent Brickflow data highlights a tightening in traditional lending, with average leverage on residential development loans often sitting significantly lower than historical levels (for example, 66% compared to typical 70%+ in more stable periods). This shortfall often makes mezzanine finance a critical part of the funding mix.

While mezzanine loans carry higher interest due to their subordinated position, they help developers progress without diluting ownership, especially when used alongside senior debt.

Mezzanine Finance vs. Bridging Finance: What’s the Difference?

Both mezzanine and bridging loans can plug funding shortfalls, but they serve different purposes and are structured differently:

Bridging Finance

• Purpose: Short-term, interest-only loans for quick property purchase or refinance.
• Security: Secured by a first or second charge.
• Typical Use: Time-sensitive acquisitions (e.g., auction purchases, land acquisition).
• Repayment: Commonly repaid within 6 to 18 months, often upon sale or refinance.

Mezzanine Finance

• Purpose: Tops up a senior loan to cover an equity gap.
• Security: Subordinated to senior debt; repaid second.
• Typical Use: Development or investment projects.
• Cost: Higher cost due to increased risk.
• Hierarchy: Always secondary funding, requiring a deed of priority between lenders.

In short, bridging is usually the primary funding solution for a time-sensitive acquisition. Mezzanine, however, is a complementary layer, helping complete the capital stack when senior debt and equity alone aren’t enough. To dive deeper into short-term solutions, explore the pros and cons of a bridging loan.

Not sure which is right for your project? Our team can help you compare funding options and structure the most efficient capital stack. Speak to a Brickflow specialist or use our bridging loan calculator to get started.