Gap funding that gets schemes built

Most senior lenders cap out at 60 to 65 percent of cost. That leaves a developer finding 35 to 40 percent in equity, capital that could be working across two or three schemes instead of one. Our mezzanine finance fills that gap with a simple second-charge structure, taking combined leverage to as much as 90 to 95 percent loan to cost.

Where mezzanine sits

Mezzanine finance is a second-charge development loan that fills the space between your senior debt and your own equity. A mezzanine loan lets development projects carry more debt and less equity without touching the senior facility. In capital structure terms it is subordinated debt: junior to the senior facility, senior to your equity. Your senior lender keeps first charge and funds the majority of cost; if you are still assembling that layer, Construction Capital covers the senior development finance market. We take a second charge and fund the next slice of cost. Your equity, now a fraction of what it would otherwise have been, sits on top; developers who want to reduce it further sometimes bring in JV equity alongside or instead of mezzanine.

The relationship between the two lenders is governed by an intercreditor agreement: who is repaid first, how drawdowns flow, and what happens if things go wrong. Senior development finance providers, from banks regulated by the Prudential Regulation Authority to specialist funds, are used to lending with mezzanine funding sitting behind them, and we have agreed these documents with most of the active UK senior lenders, so they rarely slow a deal down.

How mezzanine finance works, from drawdown to exit

Mezzanine development finance works as one coordinated layer of the funding rather than a separate loan bolted on at the end. Once a term sheet is agreed, our security is a second charge that sits behind the senior development finance facility in the repayment waterfall. An independent RICS valuation confirms the site value and the end value, and the intercreditor agreement sets out how the senior lender and Max Mezz share drawdowns, monitoring and enforcement rights.

During the build, funds are drawn down against verified progress, usually alongside the senior lender's own drawdowns and a monitoring surveyor's certificates. Interest is typically rolled up rather than serviced monthly, so the loan does not drain the cash flow of a scheme that is not yet generating sales. That rolled-up interest is added to the balance and cleared at exit.

Repayment comes at exit, when the developer sells the completed units or refinances onto longer-term debt. At practical completion the senior lender is repaid first, then Max Mezz, then any remaining profit flows to the developer and to equity. A credible exit strategy, whether an open-market sales programme or an agreed refinance, is the single thing every mezzanine lender underwrites hardest, because it is how the loan gets repaid.

Rates, fees and the blended cost of capital

Mezzanine financing is priced for its position in the stack. Because the loan is subordinated to senior debt and carries more risk, pricing is indicatively 12 to 18 percent a year, set around the deal rather than from a rate card. Some providers publish rate cards for mezzanine funding; in practice every serious quote is built case by case. On top of the rate there is usually an arrangement fee, typically 1.5 to 2.5 percent of the loan, and on some structures an exit fee. Interest on a mezzanine loan is usually rolled up rather than serviced: no monthly interest payments during the build, with the accrued interest cleared at exit alongside the principal. Every figure is written into the term sheet before you commit, with nothing appearing later.

Seen in isolation the rate looks expensive. The number that actually matters is the blended cost across the whole capital stack. With senior debt at, say, 7.5 percent covering most of the cost and a thinner slice of mezzanine at 15 percent, the blended rate across the funding often lands close to 10 percent a year. Against that modest increase in the cost of capital, you free up equity for the next scheme and lift the return on the equity you do deploy. Our mezzanine leverage calculator lets you model the blended rate and the equity released for your own numbers.

Mezzanine, bridging and stretch senior compared

These three kinds of development finance are often confused, but they solve different problems. A bridging loan is a first-charge, standalone facility for buying quickly or funding light works, usually at 65 to 75 percent of value; it replaces nothing and sits on its own. Stretch senior rolls senior debt and part of the gap into a single first-charge development finance facility at a higher loan to cost, which is simpler but not always available or cheaper once the whole cost is weighed. Mezzanine finance is the second-charge option: it sits alongside an existing senior loan and lifts combined leverage without disturbing it.

Which is right depends on what you are doing. If you are acquiring a site at speed, a bridge does the job, and Bridge Financing covers that market; many developers bridge to buy, then refinance into senior plus mezzanine for the build. Our guide to mezzanine finance versus bridging loans walks through the decision in more detail.

Advantages and disadvantages

The honest case for mezzanine financing is about capital efficiency, not desperation. The advantages are real: you leave less equity in each scheme, so the same cash can support two or three developments instead of one; the return on the equity you do deploy rises sharply; you can move quickly on auction and off-market opportunities; and you build a track record faster by running more schemes at once.

The disadvantages deserve equal honesty. The headline rate is higher than senior debt because the risk is higher, so mezzanine only makes sense where the profit on cost has room to absorb it. The second-charge position means that in a downside the senior lender is repaid before us, and most facilities are backed by personal guarantees. The intercreditor arrangement adds a layer of legal work, though a lender that knows the senior market keeps it quick. Mezzanine is the wrong tool for a thin-margin scheme; it rewards deals with genuine headroom.

Residential development and other sectors we fund

Most of our mezzanine development finance goes to property developers building residential schemes, from small infill sites of five units to schemes of a hundred plus, where demand is deep and the exit is a clear sales programme. We also fund beyond pure residential: purpose-built build to rent, operational assets such as care homes, and mixed-use schemes with a residential core. Our residential development page sets out how we size each deal, and the sectors hub covers the full list. To see where the wider market is heading, our UK development pipeline data tracks activity by region and sector.

A worked example

On a £5,000,000 total cost scheme, the stack might look like this:

Illustrative only. Every stack is sized and priced case by case.

Who mezzanine finance suits, and the track record we look for

Mezzanine funding suits property developers who think in portfolios rather than single deals, and who have the delivery record to match. As a mezzanine lender we see it used most often for:

• Residential developments, from 5 units to 100 plus
• Mixed-use schemes with planning in place
• Experienced developers scaling a portfolio
• Auction purchases that need capital deployed quickly
• Planning-led opportunities with strong GDV upside

The credit fundamentals matter more than the label: a realistic cost plan, a profit on cost of 20 percent or better, planning in place, and a team that has delivered before. We normally look for at least two to three completed schemes; first-time developers can still work with us by partnering with an experienced developer or offering additional security. You can follow the full process on our how it works page, and investors looking at the other side of the same loans can start on our investors page.

Lender first, broker where it serves you

Most mezzanine financing we fund as principal from our own book, which is why the decision is fast. But no single book fits every deal. Where your case suits another provider's appetite better, on pricing, leverage or sector, we arrange the funding whole of market instead, and we tell you which capacity we are acting in before terms are agreed. You get the right mezzanine development finance, not just our mezzanine.