What is mezzanine finance? Second-charge development funding explained

Senior development lenders stop at 55% to 65% of project cost. Build costs do not stop there, which leaves a gap on every scheme, and as of June 2026 there are exactly three ways to fill it: your own cash, a profit-sharing equity partner, or a second loan that sits behind the bank. That second loan is mezzanine finance. On the six-house scheme this site uses as its worked example, the gap is £425,000 on £1,975,000 of total cost, and a mezzanine lender will fill it for a known, fixed price of roughly £102,000 over 18 months.

This guide answers the generic question, what mezzanine finance is and where the term comes from, then does what the corporate-finance explainers do not: works the numbers on a real-shaped UK development, shows exactly how and when a mezzanine loan is repaid, and sets out when it beats giving an equity partner a share of the profit. The product page with current terms sits at mezzanine finance for property development.

Mezzanine finance: the layer between senior debt and equity

Mezzanine finance is a loan that ranks behind a senior lender and ahead of the owner’s equity. The name is the architecture: a mezzanine floor sits between the ground floor and the first floor, and mezzanine capital sits between debt and equity in a company’s or a project’s funding structure. It is debt, with a fixed coupon and a repayment date, but it carries equity-like risk because it is only repaid once the senior lender has been paid in full.

The term covers two related but different markets, and search results blur them. Corporate mezzanine funds trading businesses, management buyouts and growth capital: terms run five to eight years, the coupon is often part cash-pay and part rolled, and lenders frequently take warrants, a right to buy shares cheaply, as an equity kicker. The Bank of England tracks this market-based corporate lending alongside bank credit in its financial stability work. Property development mezzanine, the version this guide is about, is a different animal: 12 to 24 months rather than five years, secured on a specific site by a second legal charge, sized against the scheme’s gross development value (GDV, the completed sales value of the units), and almost always fully rolled up, meaning no payments are made until the scheme sells. Everything below is about the property version.

Position defines everything else. In the development capital stack, the senior lender holds the first charge and the right to be repaid first; the mezzanine lender holds a second charge and is repaid second; the developer’s equity ranks last and takes the first loss. Pricing follows that queue exactly: as of June 2026, senior development money prices at 7% to 11% per annum, mezzanine at 14% to 20%, and equity partners expect a 25% to 35% per annum equivalent. Same scheme, three prices, one variable: who gets paid first when the units sell, and who gets hurt first if they sell badly.

How a mezzanine loan is structured on a UK development

A property mezzanine facility has five standard components. First, the second legal charge over the site, registered behind the senior lender’s first charge. Second, a debenture or share charge over the development SPV (special purpose vehicle, the single-project limited company that owns the site), which lets the mezzanine lender take control of the company rather than the site if things go wrong. Third, a personal guarantee (PG) from the developer, commonly 100% of the mezzanine principal, against the 15% to 25% typical on senior facilities. Fourth, the rolled coupon: interest accrues monthly and compounds, with nothing payable until redemption, because a scheme under construction produces no income to service debt. Fifth, fees: arrangement at around 2% of the facility, often an exit fee of 1% to 2% of the facility or, on some structures, a percentage of GDV.

The document that makes the whole structure work is the intercreditor agreement, or on smaller deals a deed of priority. This is the contract between the two lenders, not between either lender and you, and it fixes the ranking: the senior is repaid first, the mezzanine lender agrees not to enforce its security or demand repayment while the senior loan is outstanding (the standstill), and in exchange gets defined cure rights, the ability to step in and fix a default on the senior loan to protect its own position. Senior lenders will only work behind-the-scenes with mezzanine providers they know, which is why the practical question on any stacked deal is not "can I get mezzanine" but "will my senior lender accept this mezzanine lender", and it is worth resolving before either side instructs valuers. The full comparison of the two layers is in our guide to senior debt versus mezzanine debt.

A worked example: £425,000 of mezzanine on a £2.4m GDV scheme

Take the scheme used across this site: six houses, GDV £2,400,000, built over 18 months. Land costs £600,000, build £1,080,000 including contingency, professional fees and section 106 costs £110,000, and senior finance costs £185,000, for total costs of £1,975,000 and an appraised profit of £425,000, about 21.5% on cost. The senior lender advances £1,300,000, roughly 66% of cost and 54% of GDV. The developer has £250,000 of cash available. The gap is £425,000.

The mezzanine cost breaks down as £89,250 of coupon (14% per annum on £425,000 for 18 months, ignoring compounding for clarity), an £8,500 arrangement fee and a £4,250 exit fee: call it £102,000. That comes off the £425,000 appraised profit, leaving the developer around £323,000. Now look at what the £102,000 bought. Without mezzanine the developer needed £675,000 of cash and made £425,000, a 63% return on equity over the project. With mezzanine they needed £250,000 and made £323,000, a 129% return on equity, and the £425,000 of cash they did not tie up is free to fund the next site. That arithmetic, paying a fixed price to multiply the return on a limited pool of cash, is the entire case for mezzanine. Run your own numbers through the mezzanine cost calculator.

How mezzanine debt is repaid: the waterfall in practice

Mezzanine is repaid from the exit waterfall, the contractual order in which sales proceeds are distributed, and the order is absolute. As each completed unit sells, the proceeds go first to the senior lender until its principal, rolled interest and fees are cleared in full. In practice the senior facility agreement sets a minimum release price per unit, commonly 85% to 95% of each unit’s net sale price, so the senior loan amortises quickly across the first sales. Only once the senior is whole do proceeds flow to the mezzanine lender: principal, then the rolled coupon, then the exit fee. Whatever is left after both lenders belongs to the SPV, which means the developer’s equity comes back and the profit lands last.

On the worked scheme, the queue looks like this. The senior lender’s total claim at exit is about £1,430,000 once rolled interest and fees are included. The mezzanine claim is about £527,000. Sales of £2,400,000 clear both with £443,000 left for the SPV, which returns the developer’s £250,000 and a profit of £323,000 after the mezzanine costs already counted. Now stress it. At sales of £1,950,000, a 19% fall in GDV, the senior is repaid in full, the mezzanine is repaid almost in full, and the developer’s profit and most of their £250,000 are gone. Below £1,430,000 of proceeds, a 40% fall, the mezzanine recovers nothing at all. The developer’s equity and profit are the buffer that protects the mezzanine; the mezzanine is the buffer that protects the senior. Note that on more aggressive stacks, where combined debt reaches 90% of cost, the band between "mezzanine whole" and "mezzanine wiped out" narrows to a 10% to 15% fall in GDV, which is exactly why pricing rises with leverage.

Why second-charge funding costs 14% to 20%: price follows the queue

The coupon is not lender greed, it is arithmetic. A senior lender at 54% of GDV on this scheme is not exposed until the completed value falls 40%; outcomes that bad are rare, so senior money is cheap. The mezzanine lender’s £425,000 occupies the slice of value between roughly 60% and 75% of GDV once interest is included: a band that historic UK housing corrections have actually reached. The Office for National Statistics UK House Price Index recorded national peak-to-trough falls of around 15% in 2008-09, with new-build and regional markets falling further, and that is before adding the forced-sale discount a receiver accepts. A mezzanine book will take real losses across a cycle, and the 14% to 20% coupon on the loans that repay is what absorbs the ones that do not.

There is a second, structural reason the gap between senior and mezzanine pricing is so wide. Banks’ cost of holding development loans is set by regulatory capital rules: under the Prudential Regulation Authority’s implementation of the Basel framework, land and development lending attracts the highest risk weightings on a bank’s book, and the capital a bank must hold climbs steeply as leverage rises. That is why bank-funded senior money stops at 55% to 65% of cost rather than tapering gradually: above the line, the capital cost makes the lending uneconomic at any rate a borrower would pay. The mezzanine market exists precisely because non-bank lenders, funds and private credit, are not subject to bank capital rules and can hold the 65% to 90% slice that banks structurally cannot. Mezzanine is not a worse version of senior debt; it is a different investor base renting out a different part of the risk curve.

When mezzanine debt makes sense, and when equity beats it

Mezzanine is the right tool when three things are true at once. The scheme is strong: profit on cost of 20% or better on a defensible appraisal, because the rolled coupon comes out of the margin and a thin scheme cannot afford it. The gap is modest: mezzanine works hardest filling the slice from 65% to 85% of cost; it cannot take you to 100%. And the developer is confident on programme, because rolled interest compounds against you with every month of slippage.

The alternative for the same gap is a JV equity partner taking a profit share instead of a coupon, and the comparison is a crossover calculation, worked in full in our guide to mezzanine versus equity. The short version on this scheme: the £425,000 gap costs £102,000 as mezzanine. An equity partner funding the same £425,000 at a 10% priority return plus 40% of residual profit would take roughly £64,000 of priority return plus about £144,000 of profit share, around £208,000 in total. On a scheme that performs to plan, mezzanine is roughly half the price. The order reverses when things go wrong: the mezzanine coupon keeps accruing through a nine-month sales delay and its PG sits on your house, while an equity partner’s return simply shrinks with the profit. Fixed cost versus shared risk is the real choice, and scheme risk, not headline price, should make it.

What mezzanine lenders actually underwrite

Having sat on the lending side of stacked deals for 25 years, our founder’s observation is that mezzanine credit decisions concentrate on three questions, in a fixed order. First, the senior terms: a mezzanine lender underwrites the facility in front of it before the scheme behind it, because a senior loan with an aggressive release price or a short tail can starve the mezzanine of proceeds even on a scheme that sells well. Second, the exit: sold comparables supporting the GDV unit by unit, and a realistic sales rate, because mezzanine sits exactly where a 15% valuation miss lands. Third, the developer’s behaviour under stress, read from credit history, prior schemes and the honesty of the contingency line, because the mezzanine lender’s recovery in a workout depends almost entirely on the developer finishing the building. Track record substitutes for security here in a way it never quite does at senior level: an experienced developer with three completed schemes borrows mezzanine at 14%; a first-timer pays 18% to 20% if they are offered terms at all. UK Finance’s lending data shows how concentrated bank appetite for development remains, which is why the non-bank mezzanine pool keeps growing: the demand above 65% of cost has nowhere else to go.

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Last reviewed: June 2026.