Mezzanine: how a land deal gets to 80% of capitalization

Most land deals do not fail because the sponsor cannot find a senior lender. They fail at the gap — the space between what the senior will advance and what the entitlement actually costs.

That gap is what mezzanine debt fills.

The arithmetic of the gap

A senior land lender is sizing at 50% loan-to-cost. On a $12M total project cost, that is a $6M loan. The sponsor needs to fund $6M of equity to close and carry the approvals.

Sometimes that equity exists. Often it does not — not without selling a piece of the deal, bringing in a partner, or delaying the entitlement.

Mezzanine capital goes in behind the senior loan and pushes total capitalization toward 80%. On the same $12M project, that is roughly $9.6M of total debt instead of $6M. The mezzanine has been placed up to 80% of total capitalization at a 14% coupon.

Why a 14% coupon

Because mezzanine is not senior debt and should not be priced like it. Three reasons:

• It sits behind the first lien. If something goes wrong, the mezz gets paid after the senior lender is made whole.
• The collateral is land mid-entitlement. Values depend on approvals that may not exist yet.
• The term is short and the exit is specific. Mezz is priced to a milestone, not to a decade of cash flow.

Fourteen percent is what that risk costs in today's market. If a quote comes in materially below that on unentitled land, ask what the lender is actually secured by.

What mezz expects from the sponsor

A mezzanine lender is not a passive participant in a land deal. Expect scrutiny of:

1. The senior loan documents, including the intercreditor agreement.
2. A dated entitlement schedule with named milestones.
3. The sponsor's own cash in the deal — mezz does not replace the sponsor's equity entirely.
4. A defined exit: a written take-out, a purchase contract, or a credible sale process.

When mezz is the wrong tool

If the deal has no senior lender yet, mezz is premature. If the entitlement has no dated milestones, mezz is a bridge loan with extra steps. And if the sponsor's plan depends on land values rising to repay the mezz, that is not mezzanine — that is equity risk wearing a debt label.

Used properly, mezzanine does one thing well: it lets a sponsor keep a deal they believe in, without selling down basis to fund a gap that closes in eighteen months.

The conversation to have

Bring the senior term sheet, the entitlement budget, and the exit. Not the marketing package. The three documents together tell a mezzanine lender whether the gap is a timing problem — which is financeable — or a value problem, which is not.