How a typical capital stack works
A development's funding is often described as a stack. Senior debt sits at the bottom, secured by a first charge, and typically covers a large share of costs up to a limit on the loan to gross development value. Mezzanine debt sits above it, usually secured by a second charge, and covers a further slice of costs. The developer's equity sits at the top and takes the first loss if the scheme underperforms.
With mezzanine, total borrowing can cover a much higher share of costs than senior debt alone, leaving the developer with less cash in. Because the mezzanine lender is repaid after the senior lender, it charges a much higher rate and often a share of profit or a minimum return.
Mezzanine or stretch senior?
Stretch senior is a single loan from one lender at a higher leverage than standard senior debt. It avoids the cost and complexity of two lenders and an intercreditor agreement, and can be cheaper overall than senior plus mezzanine at similar leverage. Mezzanine can reach higher total leverage, but at a higher blended cost.
The right answer depends on the scheme's margin. Finance costs come out of profit, so we compare the profit after finance under each structure, not just the headline leverage.
Joint venture equity
In a joint venture, an equity partner contributes some or all of the developer's equity in return for a share of the profit, rather than an interest rate. It can make a scheme possible where the developer has the site and expertise but not the cash. The partner will want a say in key decisions, and the profit share can be substantial.
On our panel, one development lender states that it also offers mezzanine and joint venture equity alongside its development loans, including a combined senior and mezzanine facility. Others state that they will consider third-party mezzanine or equity partners behind their loan. Joint venture terms need careful legal advice.
Intercreditor agreements and timing
Where two lenders are involved, they sign an intercreditor agreement setting out who is repaid first, who controls decisions if the scheme runs into trouble, and how drawdowns work. Negotiating it adds legal cost and time, so it is best started early. Many senior lenders do not allow any second charge, so their attitude to mezzanine should be checked at the outset.
We compare lenders on leverage, cost and willingness to work alongside mezzanine or joint venture funding, then approach those that fit with a clear case. Final terms depend on each lender's valuation, monitoring surveyor and checks.
