Quick answer: A development funding gap is the difference between total project uses and the senior lender’s approved facility plus committed sponsor equity. Fix it before settlement or construction starts. Possible solutions include more equity, reducing costs, restructuring the senior facility, vendor terms, presales or subordinated/mezzanine capital, each with different cost and control implications.
Property-backed business gap: If the shortfall is in a non-development business transaction and Australian property is available, see My Bank Won't Fund the Full Business Deal — Can Property Equity Cover the Shortfall?.
This is a high-value finance problem because a project can be viable on paper but unfinanceable if the borrower cannot fund the gap between senior debt and total uses.
Have a senior offer but still have a gap? Request a development-funding structure review before adding expensive secondary debt.
Worked example: calculate the gap before choosing how to fill it
Illustrative only.
| Item | Illustration |
|---|---|
| Total project uses | $4,000,000 |
| Senior lender facility | $2,800,000 |
| Sponsor equity available | $800,000 |
| Funding gap | $400,000 |
| Possible responses | More equity, cost reduction, senior restructure, vendor terms, mezzanine / second-ranking debt |
| Key test | Does the completed capital stack still leave a viable profit and exit? |
Confirm the gap is real
Reconcile land, build costs, professional fees, statutory costs, interest, lender fees, GST timing and contingency. A spreadsheet gap caused by missing or duplicated costs is different from a genuine capital shortfall.
Use the cheapest suitable capital first
Additional sponsor equity or a lower-cost senior restructure generally sits ahead of expensive subordinated capital in the decision process. But keeping some liquidity in reserve can also matter; do not solve the gap by leaving no contingency.
Understand what mezzanine or second-ranking debt changes
Subordinated capital can be useful where senior leverage is capped, but it can add materially higher cost, intercreditor requirements and tighter exit pressure. The project margin needs to absorb it.
Re-test the exit after filling the gap
More debt increases the amount that must be repaid from sales or refinance. A solution that gets construction started but destroys the exit margin is not a solution.
What to do next
Send the feasibility and senior facility terms for a funding-gap review.
Frequently asked questions
What is a development funding gap?
The amount left after comparing total project uses with committed senior debt and sponsor equity.
Can a second mortgage fill the gap?
Potentially, subject to senior-lender consent, security priority, serviceability/exit and the economics of the project.
Is mezzanine finance the same as equity?
No. Mezzanine is generally debt or debt-like capital with its own repayment and pricing terms.
Should I use every dollar of cash to close the gap?
Not automatically. The project still needs adequate contingency and liquidity for variations and timing differences.
Sources and verification
Related GPS Finance guides
General information only. Business and commercial lending policy, pricing, security, guarantees, documentation and approval vary by lender and transaction. Examples are illustrative and are not credit, legal, tax or accounting advice.
Need help matching this to a business-finance option?
GPS Finance can review the funding purpose, conduct, documents and lender fit before you make a formal enquiry.
