The capital stack
A development is funded in layers. Senior debt is repaid first and is cheapest. Mezzanine debt sits behind it and is repaid next. Equity is repaid last and takes the most risk, so it expects the highest return. Your own cash is part of the equity.
Senior lenders commonly fund up to around 85% to 90% of costs; see deposits for development finance. Mezzanine and equity close the remaining gap.
How mezzanine works
Mezzanine is usually secured by a second charge on the site, behind the senior lender. The two lenders sign an inter-creditor deed setting out who is repaid first, how drawdowns are coordinated and what happens in default. Not every senior lender accepts mezzanine behind it.
Mezzanine is priced well above senior debt, often with an arrangement fee and sometimes a share of profit. Total leverage across both can reach very high levels of cost.
Stretch senior as an alternative
Stretch senior is a single loan at higher leverage than standard senior debt. It avoids a second lender and the inter-creditor process, which can be simpler and quicker. Comparing a stretch senior quote with a senior plus mezzanine structure is worthwhile.
How development equity works
Equity investors contribute cash, usually towards the land, in return for a share of the profit or a fixed preferred return. Structures include joint ventures, where a partner shares profit and sometimes control, and preferred equity, which receives a set return before the developer's share. Equity may come from private individuals, family offices or specialist funds.
Equity is repaid only after all debt, so investors take the most risk and expect a significant share of the profit. It can be the right choice for a first scheme or a large project.
Choosing a structure
- What each layer costs as a share of the expected profit
- Whether the senior lender accepts mezzanine
- The control and consent rights given to investors
- How returns are paid if the scheme runs late or over budget
- Personal guarantees required by each party
Model each option in your appraisal, then compare senior and stretch terms on Instant Quotes.
An illustrative stack
Take an illustrative scheme with total costs of £4,000,000 and a GDV of £5,600,000.
- Senior debt at 70% of costs: £2,800,000
- Mezzanine at a further 15% of costs: £600,000
- Developer and equity partners: £600,000
Without the mezzanine, the developer would need £1,200,000. With it, the cash requirement halves, but the mezzanine's interest and fees come out of the profit. If the expected profit is large enough, the developer can complete more schemes with the same capital. If it is thin, the extra cost can absorb most of the return. These figures are for illustration only.
Common questions
What is mezzanine finance in property development?
A second loan behind the senior lender, usually secured by a second charge, that increases total borrowing at a higher cost.
What is the difference between mezzanine and equity?
Mezzanine is debt with an agreed return. Equity is investment that shares in the profit and is repaid last.
Is stretch senior cheaper than mezzanine?
Often, though it depends on the scheme. Stretch senior is a single loan, which avoids a second lender and an inter-creditor deed.
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.
