Senior debt
A first charge development loan, usually funding most of the build and part of the land. Senior lenders commonly lend up to around 60% to 70% of GDV and up to around 85% to 90% of costs, whichever is lower. It is the cheapest layer because it is repaid first. See development finance.
Stretch senior
A single first charge loan that reaches higher leverage than standard senior debt, typically closer to 75% of GDV and up to around 90% of costs. One lender, one set of legal documents and one monitoring surveyor make it simpler than layering two loans. The rate is higher than standard senior but often below a senior and mezzanine blend. See stretch senior development finance.
Mezzanine finance
A second loan behind the senior lender, usually secured by a second charge and an intercreditor agreement between the lenders. It fills part of the gap between the senior loan and total costs. Mezzanine is priced well above senior debt, sometimes with a profit share, because it is repaid only after the senior lender. See mezzanine development finance and mezzanine and equity explained.
Equity and preferred equity
Equity is the money at risk first and repaid last: your own cash and any investor capital. Preferred equity sits between mezzanine and common equity, with an agreed return paid before the developer's profit. Equity providers usually take a share of the profit rather than interest, so their cost depends on how well the scheme performs.
Joint ventures
In a joint venture, a partner brings land, capital or experience in exchange for a share of the profit. Common structures include a landowner contributing the site, an equity partner funding the developer's contribution, or an experienced developer partnering with a first-time developer. Most JVs use a shared SPV with a written agreement covering contributions, decisions, profit split and what happens if things go wrong. Lenders assess the combined experience and the structure. See setting up an SPV for development.
Peak debt
Peak debt is the highest amount outstanding at any point, usually near the end of the build when all funds are drawn and interest has rolled up. Lenders size their facility to peak debt against their LTGDV limit.
On phased schemes, early sales can repay part of the loan before the later phases are built, so peak debt can be well below the total cost of the whole scheme. Some lenders structure facilities around this, which can reduce the equity needed. See phasing a development.
Choosing your stack
- More leverage means less of your cash in and a higher return on capital, but a higher total cost and less margin for error
- Each extra layer adds legal cost, time and an extra party to agree changes
- Lenders look at the whole stack, so a senior lender must approve any mezzanine or equity terms
Compare the options on ROCE and the true cost, and see lenders on Instant Quotes to apply online. For schemes needing very high leverage, see 100% development finance.
Common questions
What are the types of development finance?
Senior debt, stretch senior, mezzanine, preferred equity and common equity, often combined in one capital stack. Joint ventures are a way of bringing in equity or land.
What is peak debt in development finance?
The highest balance outstanding during the project, usually near the end of the build. Lenders size their facility to it.
Is mezzanine finance worth it?
It can be when it lets you fund a profitable scheme with less cash or run more projects. Compare the extra cost against the return on your capital.
What is the difference between stretch senior and senior plus mezzanine?
Stretch senior is one loan from one lender. Senior plus mezzanine is two loans with two charges, which adds legal cost and complexity.
This guide is for general information only and should not be treated as legal, tax or financial advice. Lender requirements depend on the property and your circumstances.
