What is mezzanine finance?
Mezzanine finance (or "mezz") is a layer of debt that sits between senior lending and the developer's own equity in the capital structure. It allows developers to reduce the amount of their own cash required for a project — increasing leverage but at a higher cost than senior debt alone.
In a typical UK development finance structure, senior debt might cover 55–65% of GDV. The developer provides 15–20% as equity. Mezzanine fills the remaining gap — typically 10–20% of GDV — so the developer needs less of their own capital.
How mezzanine finance works
Mezzanine debt is subordinated to senior debt, meaning the senior lender gets repaid first in any default scenario. Because of this higher risk position, mezzanine lenders charge significantly more — typically 15–25% per annum, versus 8–12% for senior debt.
The mezzanine lender enters into an intercreditor agreement with the senior lender, setting out the priority of repayments and the circumstances under which each lender can take action. This adds legal complexity and cost to the transaction.
When does mezzanine make sense?
- Capital efficiency — when you have multiple projects and want to spread your equity across more deals rather than concentrating it in one.
- Larger schemes — projects where the equity requirement would otherwise be prohibitively large for the developer.
- Strong margins — schemes with profit on cost of 25%+ can absorb the higher cost of mezzanine and still deliver attractive returns.
- Speed — when a deal needs to move quickly and raising additional equity would take too long.
Mezzanine vs stretched senior
Stretched senior is an alternative to the senior + mezzanine structure. A single lender provides a higher-leverage facility (65–75% LTGDV, 85–95% LTC), eliminating the need for a separate mezzanine provider. Benefits include: simpler legal structure, one set of fees, one relationship to manage. The trade-off is that stretched senior rates (10–14%) are higher than pure senior but lower than the blended cost of senior + mezzanine.
The cost of mezzanine finance
- Interest rate: 15–25% per annum (rolled up)
- Arrangement fee: 2–3% of the mezzanine facility
- Exit fee: 1–2% of the mezzanine facility
- Legal costs: the borrower pays the mezzanine lender's legal fees plus the cost of the intercreditor agreement
When assessing total financing cost, calculate the blended rate across senior and mezzanine. For example: £3m senior at 10% + £1m mezz at 20% = blended rate of 12.5% across £4m total debt.
Frequently asked questions
Do all senior lenders allow mezzanine behind them?
No. Some senior lenders prohibit additional debt. Others will allow mezzanine subject to approval of the mezzanine provider and the intercreditor terms. It is essential to establish whether the senior lender permits mezzanine before approaching a mezzanine provider.