Senior, stretch senior and mezzanine
A standard senior development loan typically lends up to around 60% to 65% of gross development value and a share of total costs, with the developer funding the rest. Where the developer wants to put in less equity, there are two main ways to increase the borrowing.
The first is senior plus mezzanine. A senior lender provides the first charge loan, and a mezzanine lender provides a second loan that sits behind it, taking leverage up to around 75% to 80% of GDV and a higher share of costs. The two lenders sign an intercreditor agreement setting out how they rank and what each can do if the scheme runs into trouble.
The second is stretch senior. A single lender provides one loan, on a first charge, at a higher leverage than standard senior, commonly up to around 70% to 75% of GDV. The price sits between senior and mezzanine, and there is one set of documents, one monitoring surveyor and one lender to deal with.
Comparing the cost
The headline rate on stretch senior is higher than on standard senior, but it applies to the whole loan. Senior plus mezzanine combines a lower senior rate with a much higher mezzanine rate on the top slice. The way to compare them is the blended cost of the total borrowing, including arrangement and exit fees, monitoring and legal costs and any profit share.
As an illustration only: on a scheme with a gross development value of £10,000,000, a senior loan at 60% of GDV would be £6,000,000. Stretch senior at 70% would be £7,000,000 from one lender. To reach the same £7,000,000 with mezzanine, a £6,000,000 senior loan would be combined with £1,000,000 of mezzanine. The structure with the lower blended cost depends on the pricing of each part, the fees and whether the mezzanine lender takes a share of profit.
Simplicity has value too. One lender means one approval process, one set of drawdown conditions and no intercreditor negotiation, which can reduce legal costs and the risk of delay.
Who it suits and what lenders look for
Higher leverage means the lender has less cushion if costs rise or values fall, so stretch senior is usually aimed at experienced developers with a record of delivering similar schemes. Lenders look for a healthy profit margin in the appraisal, a realistic build cost with contingency, and strong evidence for the GDV.
- A track record of completed schemes of similar size and type
- A fixed-price or well-defined build contract with a capable contractor
- A profit on cost or on GDV that leaves room for the unexpected
- Detailed planning permission with conditions progressing
- Agent advice and comparable sales supporting values and sales rates
Stretch senior is typically offered on larger loans, so small schemes may find standard senior or senior plus mezzanine more readily available.
Alternatives to consider
Stretch senior and mezzanine are not the only ways to reduce the equity you put into a scheme. An equity partner or joint venture can provide part of the funding in return for a share of the profit, with no interest to pay but less of the upside retained. Deferred land payments, agreed with the seller, can also reduce the cash needed at the start.
Each option changes the risk and reward differently. We set out the structures side by side so you can weigh cost, control and resilience before deciding which to pursue.
Risks of higher leverage
Borrowing more increases the return on your equity when a scheme goes to plan, but it also increases the effect of anything that goes wrong. A cost overrun or a fall in values eats into a smaller equity cushion, and rolled-up interest on a larger loan builds up more if the programme slips.
Before choosing a higher-leverage structure, test the appraisal against higher costs, lower values and a longer programme. If the scheme still works, the case for stretch senior is stronger. If it does not, a lower-leverage structure or an equity partner may be more resilient.
We model senior, stretch senior and senior plus mezzanine against your appraisal, then approach suitable lenders. Instant Quotes gives indicative figures as a starting point, and final terms depend on each lender's valuation, monitoring surveyor and checks.
