Mezzanine finance for residential development

Residential development is the core of the UK build programme, from small infill sites of five to ten houses to schemes of a hundred plus units. Demand is driven by a persistent housing shortfall, and lenders remain broadly comfortable with well located open-market housing that has planning in place. The problem is rarely appetite for the sector and almost always the size of the equity cheque.

Most senior development lenders cap at 60 to 65 percent of cost, which leaves a developer finding 35 to 40 percent in cash before a brick is laid. On a viable scheme with sensible margin, our mezzanine layer closes that gap and takes combined leverage to as much as 90 to 95 percent of cost. We look hardest at the build programme, the strength of the sales assumptions and your track record of delivering comparable homes.

A typical residential development capital stack

Open-market housing typically supports a full 65 percent senior layer, leaving mezzanine to bridge to a thin equity slice. Illustrative only; every stack is sized case by case.

What senior lenders will and will not fund

Senior development lenders are comfortable with open-market residential housing in established locations, and most will stretch to 65 percent of total cost on a scheme with planning, a credible build cost and a developer who has delivered before. What they will not do is bridge the rest. The senior lender wants a meaningful equity cushion beneath its debt, so it stops well short of the total, and it treats anything above its own limit as your problem to solve.

That leaves a gap of 30 percent or more of cost that has to be found in cash. On a five million pound scheme, a 65 percent senior facility funds around 3.25 million and asks you to write a cheque for the balance. Mezzanine finance fills the space between the senior debt and a thin equity slice, so the same site can proceed with 5 to 10 percent of your own money rather than 35 to 40.

How mezzanine changes the equity maths

The value of the mezzanine layer is not cheaper money, it is more schemes. Priced from 12 percent a year, mezzanine costs more than senior debt, but it releases equity that would otherwise sit idle in a single project. A developer with three million of working capital can fund one all-equity scheme, or spread the same capital across three or four leveraged ones and multiply the profit the pipeline produces. Our mezzanine leverage calculator shows how the numbers move as you push combined loan to cost from 75 toward 95 percent.

Exit routes we underwrite to

Residential exits are usually clean. Most schemes repay through open-market unit sales as the development completes, and phased sites often release enough from early completions to fund later phases. Where a developer intends to hold, the exit is a refinance onto a term or buy-to-let facility once the units are built and let. We size the loan and the term to whichever route is realistic, and we prefer to see a sales strategy with named agents and a marketing plan rather than a single lump-sum assumption at practical completion.

What our underwriting focuses on

• The build programme and cost plan, including contingency and any fixed-price contract
• Sales assumptions tested against recent local comparables, not headline aspirations
• Your record of delivering comparable homes, normally two to three completed schemes
• The senior lender's terms and the intercreditor position we will hold

If your case suits a senior stretch product better than a separate mezzanine layer, we will tell you, and can arrange senior development finance whole of market instead. The point is to get you the right structure, not only our loan. For the fundamentals, our guide on why developers use mezzanine sets out the trade-offs in plain terms.