Senior development finance typically advances 60–70% of gross development cost (GDC). That leaves 30–40% to be funded by the developer. Not every developer has that equity available — and waiting until they do is not always an option when sites are trading quickly. Mezzanine finance is the structural answer: a second layer of debt that sits between the senior loan and the developer's own equity, enabling projects that would otherwise stall on funding structure. If you're working out your broader funding position on a first project, see our first-time developer finance guide first.
This article covers how mezzanine finance works, where it sits in the capital stack, what it costs, and how to structure an application. It is written for developers who have a fundable scheme and a funding gap — not for those still working out whether development finance applies at all.
What is mezzanine finance in property development?
Mezzanine finance is a subordinated loan: it ranks below senior debt but above equity in the capital stack. In practice, a senior lender advances to — say — 65% of GDC. The developer has 15% equity available. A mezzanine lender fills the 20% gap. The developer controls the scheme with 15% of their own capital instead of the 35% they would need without the mezz layer.
Mezzanine is not a product you get from a single lender who also holds your senior position. It requires a specialist mezzanine provider, a senior lender who is comfortable with a second charge sitting behind their first, and an intercreditor agreement between the two lenders that governs their respective rights. The developer does not write this agreement — the lenders agree it between themselves — but you do need to allow time for it.
Interest on mezzanine debt is commonly rolled to exit rather than serviced monthly, which preserves developer cash flow during construction. Some lenders require partial monthly servicing depending on deal structure. Drawdown typically mirrors the senior loan in tranches, with the mezzanine tranche releasing alongside the senior drawdown at each stage.
Senior debt vs mezzanine vs equity — the capital stack
Understanding the stack matters because the order in which lenders rank on exit determines both their risk appetite and their pricing. Across all development finance structures:
- Senior debt holds the first charge. It is repaid first on exit. Because the risk of not being repaid is lowest, the cost is lowest — typically 0.4–0.9% per month in the current market.
- Mezzanine debt holds the second charge. If the development is sold at a loss, the senior lender is made whole first; the mezzanine lender takes whatever remains. Because the risk is materially higher, so is the cost — typically 1.0–2.0%+ per month.
- Developer equity sits last. It absorbs the first losses and takes the residual profit. The developer's equity return justifies accepting the subordinated position.
The intercreditor deed formalises this ranking. It sets out what the mezzanine lender can and cannot do if the senior lender calls an event of default — standstill periods, enforcement rights, cure provisions. Experienced developers know it exists; first-timers often don't. Allow 2–4 weeks for the two lenders to agree it.
When would a developer use mezzanine finance?
The most common trigger: a senior lender will advance to 65% GDC but the developer only has 10–15% equity available. Without mezzanine, the deal either stalls or requires bringing in a third-party equity partner. With mezzanine, the developer retains full control of the scheme using their available capital.
Other situations where mezzanine is the right call:
- Cash preservation. Equity is available but the developer prefers to hold it in reserve for contingency, a land deposit on the next scheme, or working capital during a longer construction programme.
- JV gap. A joint venture equity partner has not yet been secured and the developer needs to move on site. Mezzanine bridges the gap while the JV is formalised — or replaces it entirely.
- Leverage threshold. The scheme is viable at 80–85% total leverage but the senior lender alone will only reach 65–70%. Mezzanine closes the gap without requiring the developer to find additional equity.
Mezzanine is not the right tool when total leverage (senior plus mezz) already approaches the lender cap — most lenders cap combined senior and mezzanine at 80–85% of GDC or 65–70% of GDV, and stretching beyond this meaningfully reduces available lenders and increases exit risk. It is also unsuitable when exit is uncertain or when the project is below the minimum ticket size most mezzanine lenders will consider (typically £1m+ on the mezzanine tranche alone). If equity is the constraint rather than the quantum of debt, a joint venture partner may address the same gap without the cost of mezzanine debt.
What does mezzanine finance cost?
Senior development finance commonly prices in the range of 0.4–0.9% per month. Mezzanine typically adds 1.0–2.0%+ per month on the subordinated tranche. Arrangement fees on the mezzanine layer are typically 1–2% of the mezzanine advance; some lenders charge an exit fee in addition.
To illustrate the blended effect (all figures illustrative): a scheme with £10m GDC, senior debt at 65% (£6.5m at 0.65% pm), mezzanine at 20% (£2m at 1.5% pm), and developer equity at 15% (£1.5m) produces a blended cost on the debt of approximately 0.84% pm — materially more expensive than senior alone, but the developer controls a £10m scheme on £1.5m of their own capital rather than £3.5m. The additional mezzanine cost is offset by the reduced equity deployed. Whether that trade-off works depends on the scheme margin, and on whether the developer has better uses for the equity released.
Run the numbers on your scheme before approaching lenders. If the mezzanine interest cost — rolled to exit — compresses your margin to the point where the return on developer equity is not meaningfully better than leaving the money in senior debt on another scheme, the structure does not work.
How to structure a mezzanine application
Mezzanine applications have a defined sequence, and getting out of sequence wastes time on both sides.
- Step 1: agree your senior lender first. Most mezzanine lenders will not engage without a named senior lender or a senior term sheet in hand. The intercreditor deed requires a counter-party. Approach the senior market first.
- Step 2: document the funding gap clearly. GDC, senior advance, own equity, and the amount you need the mezzanine lender to fill. This is a short, clean summary — not a full appraisal — but it needs to be exact.
- Step 3: appoint a broker who works across both markets. A specialist broker typically holds relationships with both senior and mezzanine lenders and can introduce the mezzanine provider once senior terms are agreed. Going direct to a mezzanine lender without a broker relationship in place is slower and rarely produces better terms.
- Step 4: build the intercreditor timeline into your programme. Allow 2–4 weeks for the lenders to agree terms between themselves. Simultaneous drawdown on day one of construction is not a reasonable assumption.
The single most common error: approaching a mezzanine lender before the senior position is clear. It creates a circular conversation — the mezzanine lender cannot price the risk without knowing the senior structure, and the senior lender may not have formally engaged yet. Sequence the process correctly and it moves quickly.
What to do next
If your scheme has a funding gap between your senior advance and your available equity, speak to a broker before approaching lenders. The mezzanine market is relationship-driven — terms vary significantly between providers, and the intercreditor process is faster when both lenders know the broker introducing the deal. For a full overview of how the product is structured, see our mezzanine finance page.
Tell us about your project and the funding structure you're working with. We'll map the senior and mezzanine market and give you a plain assessment of what's achievable.