Mezzanine Finance
When your senior development lender won’t stretch far enough to cover the full cost of your project, mezzanine finance fills the gap – letting you reduce your own equity contribution and take on more, without giving up ownership the way a joint venture partner would require.
What Mezzanine Finance Actually Is
Mezzanine finance is a hybrid form of funding that sits between senior debt and equity in a development’s capital stack. It tops up your primary development loan, secured with a second charge behind your senior lender, giving you access to funds beyond what the senior lender alone will provide.
Why Developers Use It
Senior lenders typically cap their lending around 60-65% of total project costs, or up to around 65% of gross development value, leaving a genuine funding gap between that figure and the total cost of the project. Rather than covering this gap entirely from your own capital, or bringing in an equity partner who’ll expect a significant profit share, mezzanine finance lets you top up your borrowing while retaining full ownership and more of the eventual upside.
How Much Mezzanine Finance Can Add
Most mezzanine lenders will fund up to around 20% of gross development value on top of your senior debt, with the combined facility pushing overall borrowing to 90-95% of total project costs, or up to around 80% of gross development value. This typically reduces your own required capital contribution to as little as 10% of total costs.
Cost: Why Mezzanine Finance Is Priced Higher
Because mezzanine lenders sit behind your senior lender and take on considerably more risk, rates are priced accordingly higher, commonly in the region of 10-20% per annum, occasionally reaching 30% for the riskiest projects. Some structures also include an equity kicker or profit-share element on top of the interest rate, worth factoring into your overall cost calculations rather than looking at the headline rate alone.
Why Track Record and Planning Status Matter So Much
Mezzanine lenders generally require developers to have a genuine, proven track record of successfully delivering projects, since they’re taking on meaningfully more risk than a senior lender in first position. Full detailed planning consent is also typically required before a mezzanine facility will be agreed, rather than outline permission alone – it’s worth having this firmly in place before approaching a mezzanine lender.
Personal Guarantees
Even where a development is structured through a limited company, mezzanine lenders will typically require a personal guarantee from the developer, meaning you remain personally liable for the debt if the project underperforms and the eventual sale proceeds don’t cover the full amount owed. This is worth understanding clearly and taking proper advice on before committing, given the genuine personal exposure involved.
How Mezzanine Finance Differs From a Joint Venture
Unlike a joint venture equity partner, who typically expects around a 50/50 profit share in exchange for their investment, mezzanine finance is structured as debt, meaning you retain full ownership and keep the entire upside if your project outperforms, beyond the agreed interest and any equity kicker. This is one of the most significant reasons experienced developers choose mezzanine finance over bringing in an equity partner.
Spreading Limited Equity Across Multiple Projects
Because mezzanine finance reduces how much of your own capital any single project requires, it lets developers with limited available equity spread that capital across several schemes simultaneously, rather than having it entirely tied up in one project. This can be a genuinely powerful way to grow a development business without needing to raise significant new equity capital.
Loan Sizes
Mezzanine finance is available across a genuinely wide range, from smaller facilities around £75,000 up to £15 million or more for larger schemes, though this is a genuinely specialist market served by a relatively small number of dedicated lenders rather than mainstream banks.
What Lenders Will Want to See
A typical mezzanine application requires details of your senior lender and their offer terms, full planning consent documentation, a detailed financial appraisal and cash flow forecast, build cost breakdowns, and your own track record as a developer, alongside personal or company details and, where applicable, director CVs demonstrating relevant experience.
The Risk of Using Mezzanine to Rescue an Overrun
It’s worth being genuinely cautious about using mezzanine finance to cover unexpected cost overruns on a struggling project, rather than to fund a fresh opportunity, since the already-high pricing compounds the pressure on a project that’s already underperforming. Mezzanine finance works best when applied to a genuinely sound, well-margined scheme, not as a rescue mechanism for one in difficulty.
Combining Mezzanine With Your Senior Development Facility
Mezzanine finance is typically structured after indicative terms have been agreed with your senior development lender, running in parallel through the legal and underwriting process. It’s worth discussing your full funding stack with your broker from the outset, rather than treating the senior and mezzanine elements as entirely separate conversations.
Frequently Asked Questions
How much can mezzanine finance add on top of my senior development loan?
Typically up to around 20% of gross development value, pushing combined borrowing to 90-95% of total project costs.
Why is mezzanine finance so much more expensive than senior debt?
Because the lender sits behind your senior lender in a second charge position, taking on considerably more risk, reflected in rates commonly 10-20% per annum or higher.
Do I need full planning permission to get mezzanine finance?
Generally yes – most lenders require detailed planning consent already granted, rather than outline permission alone.
Will I be personally liable even if my development is in a limited company?
Usually yes – mezzanine lenders typically require a personal guarantee regardless of the company structure used.
Is mezzanine finance better than bringing in an equity partner?
For many experienced developers, yes – it lets you retain full ownership and more of the eventual profit, rather than sharing a significant portion with a joint venture partner.
Get in touch with details of your project, your senior lender’s terms, and the funding gap you need to cover, and we’ll help you structure the right mezzanine facility.
