Mezzanine finance for property development
Mezzanine finance is the layer of funding that fills the gap between a developer's equity and the senior debt from the main lender. This guide defines it, shows where it sits in the capital stack, the loan-to-cost uplift it allows, what it costs and how it is repaid at exit.
Mezzanine finance in property development is a top-up loan that fills the funding gap between the senior debt from the main development lender and the equity the developer puts in. It sits in the capital stack above senior debt and below equity, usually secured by a second charge behind the senior lender's first charge, and it lifts total borrowing from around 70 percent to about 85 to 90 percent of loan-to-cost. Because it is subordinated and carries more risk for the lender, it costs more than senior debt, and it is repaid at exit from unit sales or a refinance once the senior loan has been cleared. DevExit arranges and places this finance; we do not lend, and it is unregulated commercial lending.
At a glance
- What it isTop-up loan filling the equity to senior debt gap
- PositionAbove senior debt, below equity in the capital stack
- SecuritySecond charge behind the senior lender
- Typical upliftFrom about 70 to around 85 to 90 percent LTC
- CostHigher rate than senior debt
- Repaid byUnit sales or refinance at exit
What mezzanine finance means in development
Mezzanine finance for property development is a second layer of borrowing that sits on top of the senior development loan and reduces the cash a developer has to put in. The senior lender funds the bulk of the project but caps its advance well short of the total cost, which leaves a shortfall between that senior debt and the developer's own equity. Mezzanine debt fills that funding gap, so the developer contributes a smaller cash amount and still gets the scheme fully funded.
It is a hybrid of debt and equity in character. It behaves like a loan, with interest and a fixed repayment, but it takes a junior, subordinated position and more risk than senior debt, which is why it is priced closer to an equity return. A mezzanine loan is usually secured by a second charge behind the senior lender's first charge, governed by an intercreditor agreement, sometimes called a deed of priority, that sets out who gets paid first. DevExit arranges and places mezzanine facilities with specialist lenders and private debt funds; we are an arranger and introducer, not a lender, and the finance is unregulated commercial lending outside the FCA regulated perimeter.
Where the mezzanine layer sits in the capital stack
The capital stack is the order in which the different sources of funding for a scheme rank for repayment. Senior debt sits at the bottom and is repaid first because it carries the least risk. Equity sits at the top and is repaid last because it carries the most. Mezzanine debt sits in between, above the senior debt and below the equity, which is exactly where its cost and its risk sit too.
| Layer | Position | Security | Repaid | Relative cost |
|---|---|---|---|---|
| Equity | Top of the stack | None, owner capital | Last, after all debt | Highest return |
| Mezzanine debt | Middle layer | Second charge | After senior debt | Higher than senior |
| Senior debt | Bottom of the stack | First charge | First | Lowest |
At exit the senior lender with the first charge is repaid before anyone else. The mezzanine lender, holding a second charge, is repaid next, once the senior debt is clear. The developer's equity and profit come last, only after both debt layers are settled. This ranking is the reason mezzanine debt is priced higher than senior debt: the junior position means more risk for the mezzanine lender.
The loan-to-cost uplift mezzanine debt allows
The point of mezzanine finance is the loan-to-cost uplift. A senior development lender typically caps its advance at around 65 to 70 percent of total cost, or a similar share of gross development value. Mezzanine debt tops that up to roughly 85 to 90 percent of loan-to-cost, so the developer only has to inject the remaining 10 to 15 percent as equity instead of 30 percent or more. That smaller cash contribution lets a developer spread equity across multiple developments and run more schemes at once rather than tying up all their capital in one.
The worked example below is illustrative only and is not an offer of finance. It shows how a 4 million pound total-cost scheme might be funded with senior debt capped at 70 percent and mezzanine topping up to 90 percent of loan-to-cost.
| Funding layer | Percent of cost | Illustrative figure |
|---|---|---|
| Total development cost | 100 percent | 4,000,000 pounds |
| Senior debt (first charge) | 70 percent | 2,800,000 pounds |
| Mezzanine debt (second charge) | 20 percent | 800,000 pounds |
| Developer equity | 10 percent | 400,000 pounds |
Without the mezzanine layer the developer would need to find 1.2 million pounds of equity for this scheme. With it, the cash contribution drops to 400,000 pounds, freeing 800,000 pounds to put into other projects. These figures are indicative and for illustration only.
When developers use subordinated development funding
Developers reach for mezzanine debt when the senior loan alone does not cover enough of the cost and they would rather not commit all their own capital. It is used to close a cash-flow gap on a viable scheme, to keep equity free for the next site, or to take on a project that would otherwise be out of reach on senior debt and equity alone.
- The senior lender's loan-to-cost cap leaves a shortfall the developer does not want to fund entirely from equity
- The developer wants to spread equity across multiple developments and increase portfolio velocity rather than lock capital into one scheme
- A profitable project has a strong margin, so the higher cost of the mezzanine layer is comfortably covered by the profit on cost
- The developer is comparing the middle option against 100 percent development finance or joint venture equity and wants to keep more of the profit
Mezzanine facilities are a specialist product, indicatively arranged from around 100,000 pounds up to several million pounds, and often quoted in a range such as 100,000 pounds to 10 million pounds depending on the lender's appetite and the scheme. We place each case with the funder whose ticket size and sector focus fit the project. Any figure here is indicative and not an offer of finance.
Senior debt against mezzanine debt
Senior debt and mezzanine debt are both loans, but they rank differently and price differently. Senior debt is the main development facility, secured by a first charge, repaid first at exit, and carries the lowest rate because it takes the least risk. Mezzanine debt is the junior top-up, secured by a second charge behind the senior lender, repaid only after the senior debt is clear, and carries a higher interest rate and higher cost of capital to reflect that subordinated position.
The two lenders sit side by side under an intercreditor agreement or deed of priority, which formally records that the senior lender ranks ahead of the mezzanine lender on the security and the sale proceeds. This is different again from a joint venture or 100 percent development finance, where a funder puts in the cash the developer would otherwise contribute in return for a share of the profit rather than a fixed interest rate. Mezzanine debt is the lower-cost middle option between straight senior debt and full JV equity.
The mezzanine lender only recovers its money after the senior lender with the first charge has been repaid in full. If a scheme underperforms, the junior layer is exposed before the developer's equity is wiped out but after the senior debt is safe. That extra risk is priced in, so a mezzanine loan carries a materially higher rate than senior debt. A personal guarantee is often required on top.
How the junior loan is repaid at exit
Mezzanine debt is repaid at exit, from the same events that clear the senior loan: unit sales or a refinance. The difference is the order. The senior lender is repaid first from the proceeds, and the mezzanine lender is repaid next, once the senior debt is fully cleared, with the developer's equity and profit released last.
- Complete the scheme and begin the sales period, or line up a refinance onto longer-term debt.
- Apply sale or refinance proceeds to repay the senior debt first, clearing the first charge.
- Repay the mezzanine facility in full from the remaining proceeds, releasing the second charge.
- Release the developer's equity and the profit on cost once both debt layers are settled.
Because the mezzanine layer is repaid in a fixed order and its cost eats into the profit, the maths only works on a scheme with a strong enough margin. Interest is usually rolled up and settled at exit, which protects cash flow during the build and sales period. Where profit is thin, a joint venture structure may fit better, and where more headroom is needed, 100 percent development finance is the adjacent alternative. We structure the exit up front so the facility runs cleanly to redemption. Any tax treatment of interest or profit is a matter for your accountant; this is not tax advice, so speak to an accountant. You can read how this connects to the wider funding picture on our pillar finance page at /finance/.
Mezzanine finance for property development: common questions
What is mezzanine finance in property development and how does it work?
Mezzanine finance is a top-up loan that fills the funding gap between the senior debt from the main development lender and the developer's equity. It behaves like a loan but takes a junior, subordinated position, usually a second charge behind the senior lender. It lifts total borrowing from around 70 percent to about 85 to 90 percent of loan-to-cost, so the developer puts in a smaller cash contribution, and it is repaid at exit after the senior debt is cleared. DevExit arranges and places it; we do not lend.
Where does mezzanine finance sit in the capital stack relative to senior debt and equity?
It sits in the middle of the capital stack, above the senior debt and below the equity. Senior debt ranks at the bottom and is repaid first because it takes the least risk. Equity sits at the top and is repaid last. Mezzanine debt sits between them, which is why it carries more risk and a higher cost than senior debt but ranks ahead of the developer's equity at exit.
What is the difference between mezzanine debt and senior debt?
Senior debt is the main development facility, secured by a first charge, repaid first at exit, and priced at the lowest rate because it takes the least risk. Mezzanine debt is a junior top-up, secured by a second charge behind the senior lender, repaid only after the senior debt is clear, and priced at a higher rate to reflect that subordinated position. The two sit under an intercreditor agreement that records the senior lender ranks first.
Is mezzanine debt secured, and what charge does it take behind the senior lender?
Yes. Mezzanine debt is usually secured by a second charge over the development, ranking behind the senior lender's first charge. An intercreditor agreement, sometimes called a deed of priority, is put in place between the two lenders to confirm that the senior lender is repaid first from the security and the sale proceeds. A personal guarantee is often required on top of the charge.
What loan-to-cost uplift does mezzanine allow and how much equity do you still need?
A senior development lender typically caps its advance at around 65 to 70 percent of cost. Mezzanine debt tops that up to roughly 85 to 90 percent of loan-to-cost, so the developer only injects the remaining 10 to 15 percent as equity. On a 4 million pound scheme, that can cut the cash contribution from 1.2 million pounds to around 400,000 pounds, freeing capital to spread across other developments. These figures are illustrative and not an offer of finance.
What are the disadvantages, typical rates and cost of mezzanine finance, and how is it repaid at exit?
The main trade-off is cost: because the mezzanine lender only recovers its money after the senior debt is repaid, it carries a materially higher interest rate and higher cost of capital than senior debt, which eats into the profit on cost. It suits schemes with a strong margin and is repaid at exit from unit sales or a refinance, after the senior loan is cleared and before the developer's equity is released. Any figure we give is indicative and not an offer of finance.
Exiting a completed scheme?
Send us the scheme and the gross development value and we will come back with a view on fundability and likely terms within one working day.