Mezzanine vs equity: the real cost of each on a development deal

The same £400,000 gap in the same development can be filled two ways, and the two invoices could hardly look more different. Fill it with mezzanine finance and the cost is fixed the day you sign: roughly £92,000 over 18 months as of June 2026. Fill it with joint venture (JV) equity and the cost is a formula, not a figure: a priority return plus a share of whatever profit exists, about £236,000 on a scheme that makes £500,000, and far less on one that makes little. One is debt with a date. The other is a shareholding with no date. Choosing between them on price alone, the way developers usually do, gets the decision wrong roughly as often as it gets it right.

This guide works the comparison properly: the structural difference, the cost of each on the same gap, the crossover point where the cheaper option flips, the risk asymmetry when a scheme struggles, control and tax differences, and a decision framework keyed to scheme risk. The products themselves live on our mezzanine finance and development equity pages.

Debt with a date versus a shareholding with no date

Mezzanine finance is a loan secured by a second legal charge over the site, sitting behind the senior facility and in front of the developer's equity in the capital stack. It has a coupon, 14% to 20% per annum as of June 2026, a fee each end, a maturity date, covenants, and usually a personal guarantee (PG) from the developer. It accrues whether the scheme prospers or stalls, and at exit it is repaid, in full, immediately after the senior lender; how the two loans rank against each other is covered in our guide to senior versus mezzanine debt.

JV equity is shares. The funding partner subscribes into the special purpose vehicle (SPV), the single-project company that owns the scheme, sometimes structuring part of the money as a shareholder loan, and is paid through a waterfall at exit: capital back, then a priority return of 8% to 12% per annum on the cash, then a split of residual profit, with the partner commonly taking 40% to 50% where the developer contributes no cash. Nothing is owed on a date; nothing is owed at all if there is no profit. The structural test is one question: if this scheme runs six months late and sells 8% light, do you want a creditor whose meter is running, or a shareholder whose return shrinks with yours? Everything else in this guide is that question worked out in pounds.

The same £400,000 gap priced both ways

Take the house scheme used across this site: six units, £2,400,000 gross development value (GDV, the completed scheme's open-market value), £1.7m of land and build costs, senior debt at 65% loan to cost, an 18-month programme, and roughly £500,000 of profit at appraisal. The funding gap above the senior facility is £400,000.

Mezzanine. £400,000 at 14% per annum, rolled for 18 months, is £84,000 of coupon; a 2% arrangement fee adds £8,000. Total cost £92,000, fixed at signing, repayable at exit whatever the scheme does. The developer keeps £408,000 of the £500,000 profit.

Equity. £400,000 of partner cash on a 10% priority return and 40% of residual profit to the partner. The priority return accrues to £60,000 over 18 months; the residual pool is £440,000, of which the partner takes £176,000. Total cost £236,000. The developer keeps £264,000, and put no personal guarantee behind the £400,000 and, in a full JV, no cash either.

The crossover point: where the cheaper pound changes sides

The table's middle row is the number worth carrying around. On this structure the equity cost equals the mezzanine cost where the priority return plus 40% of the residual equals £92,000, which solves to roughly £140,000 of scheme profit. Above £140,000, every extra pound of profit makes equity relatively dearer, because the partner takes 40 pence of it and the mezzanine lender takes nothing. Below £140,000, equity is the cheaper money, and the gap widens fast: at £80,000 of profit the equity costs £68,000 against the mezzanine's fixed £92,000, and at zero profit the equity costs nothing at all while the mezzanine is still owed in full.

Notice what the crossover sits against: £140,000 is well under a third of the appraised £500,000 profit. The scheme has to miss its appraisal by more than 70% before the equity becomes the cheaper option in hindsight. That is the honest framing of the choice: mezzanine is almost always cheaper in the outcomes you expect, and equity is cheaper only in the outcomes you fear. Which is another way of saying the £144,000 difference at appraisal is an insurance premium, and the right question is not "which is cheaper" but "is this scheme one where I should be buying insurance". Run your own crossover on the mezzanine cost calculator against the split terms you are quoted.

Risk asymmetry: the coupon that keeps running and the shareholder who shares the pain

The mechanical heart of the difference is what each pound costs when the scheme is failing. Mezzanine interest accrues on a clock, not on performance: a six-month overrun on the £400,000 facility adds £28,000 at 14% per annum, payable from a profit pool the overrun is simultaneously shrinking, and the debt's maturity date converts a slow scheme into a defaulting one. If proceeds cannot repay it, the second charge enforces and the PG follows the developer home. Equity inverts every one of those mechanics: the priority return accrues but is only ever paid from profit, the capital has no maturity to breach, and a loss is shared in proportion to the shareholding rather than borne by the developer alone. This is also why equity can cure a scheme that debt cannot: injecting more debt into a scheme already at its leverage covenant breaches the covenant it is trying to fix, while equity raises the cushion every lender measures against. With sales periods stretching in the softer-priced regions tracked by the ONS UK House Price Index, the value of money that waits without accruing against you is not theoretical in June 2026.

Control: covenants and a calendar, or reserved matters and a co-shareholder

Mezzanine governance is contractual and mostly invisible while things go well: leverage covenants, information undertakings, events of default. The lender has no vote on sales prices or contractor decisions; its power is the nuclear kind, exercised only on breach. Equity governance is constitutional and permanent: the partner sits inside the SPV with reserved matters, typically consent rights over sales below appraisal, build variations above a threshold, new borrowing and contractor replacement, plus information rights and sometimes a board seat, all set out in the shareholders' agreement under structures covered on our joint venture development finance page. Neither is better in the abstract. A developer who has run six schemes and wants no one in the room should price mezzanine's heavier PG against equity's lighter personal exposure and heavier governance. A first-scheme developer often finds the partner's oversight is the thing that makes the senior lender comfortable, so the governance they were resisting is partly what gets the stack funded.

The tax shape of each pound, and why your accountant gets a vote

The two structures also differ in where the cost lands for tax. Mezzanine interest and fees are a finance cost of the SPV: for a UK development company they are generally deductible against trading profit, subject to the corporation tax rules in force, so at the 25% main rate published in HMRC's corporation tax rates as of June 2026, a £92,000 mezzanine cost can carry an effective post-tax cost nearer £69,000. An equity partner's profit share is not a deductible cost in the same way: it is a distribution of post-tax profit to a shareholder, although structures that route part of the partner's money as an interest-bearing shareholder loan can move some of the cost into deductible territory. The comparison above, run pre-tax, therefore flatters equity slightly. The detail turns on the SPV's circumstances, the corporate interest restriction, and how the JV is papered, so treat this paragraph as the shape of the question rather than the answer, and speak to your accountant before the structure is signed: the tax difference on a £236,000 equity cost is large enough to move the crossover materially.

A decision framework keyed to scheme risk, not headline cost

Put the choice through four gates. Programme confidence: a consented scheme with a fixed-price build contract from a contractor you have used before is the low-variance case where mezzanine's fixed cost is bought safely; a scheme with unresolved conditions, complex groundworks or an untested contractor is exactly where the accruing coupon hurts, and equity's patience earns its premium. Margin: at 25%+ profit on cost both options work and mezzanine usually wins on price; below 20%, mezzanine lenders decline and the question answers itself. Your balance sheet: mezzanine arrives with a PG commonly set at 20% to 100% of the loan, so a developer whose personal covenant is already pledged across two live schemes is buying risk concentration with the cheaper coupon; equity adds none. Your pipeline: if the £400,000 of freed cash funds the next site, mezzanine's £92,000 is the price of running two schemes, and the second scheme's profit dwarfs it. The pattern across the gates is consistent: mezzanine is the tool for strong schemes run by developers who can absorb a bad outcome, and equity is the tool for schemes, or balance sheets, that cannot. Pricing both against a base anchored to the Bank of England Bank Rate moves with the cycle; the asymmetry between a creditor and a shareholder does not.

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Last reviewed: June 2026.