Mezzanine Capital: Definition, Costs and Applications

How does mezzanine capital work?

In the capital structure, mezzanine stands between the first rank Senior loans and the Equity of the sponsor. Legally, it is usually considered Subordinated loans Designed – often Partial with a share of profits; or Equity kicker. Because the mezzanine lender is only served after the bank in the liquidation case, many banks accept it as an economic equity: The developer has to commit fewer own funds.

Typical basic data and use cases

• Volume and leverage: Mezzanine often raises the total funding to 85–95 % of project costs.
• Term: Project-accompanying 12 to 48 months, final, repayment from sale or refinancing.
• coupon: clearly double digits possible – depending on rank, finish and project phase; details in the guide Mezzanine interest rates.
• Operation: Equity gap at project start, land purchase, construction phase, capital release for parallel projects.

Does mezzanine work? The return logic

Mezzanine is expensive capital – but it replaces the most expensive capital ever: equity. The decisive factor is the comparison at project level: Does the additional leverage increase the return on equity more than the mezzanine interest burden the margin? This is often the case for solid projects with a clear exit; with tight margins, mezzanine can also override a project. We structure and mediate mezzanine tranches from €750,000 up to double-digit millions via debt funds, family offices and institutional lenders – details on the service page Mezzanine property finance.