Mezzanine finance is an additional subordinated loan (behind the senior debt provider) which is generally secured by a second mortgage over the property. Mezzanine finance is used when the senior debt (i.e. the primary loan secured by a first mortgage) plus the developer’s equity is not enough to cover the total development cost of the project.

Mezzanine finance can also be used to reduce a developer’s equity to allow them to use their equity for other projects and “in doing so” diversifying their risk.  

Mezzanine finance comes at a higher cost, but reducing the developer’s equity contribution will increase the return on equity considerably.