Mezzanine Structure — 48 Units

An established developer had secured a prime edge-of-town site with full planning for 48 residential units — a mix of 2 and 3-bed houses and apartments. Total development costs were approximately £16.2m against a GDV of £22m, representing a healthy 36% profit on cost. By any measure, a strong scheme.

The problem was equity. The developer had £2.4m available — roughly 15% of total costs. Senior development lenders would typically fund 60–65% of costs, leaving a gap of over £3m that the developer couldn't fill from their own resources. Without additional capital, the project would not proceed despite its strong fundamentals.

Mezzanine finance is conceptually simple — it fills the gap between senior debt and developer equity — but structurally it is anything but. The senior lender takes first charge; the mezzanine provider sits behind them on a second charge with an intercreditor agreement governing the relationship between the two.

The intercreditor terms are where deals often fall apart. Senior lenders can be protective of their position and reluctant to agree standstill periods, cure rights, or step-in provisions that mezzanine providers require. The drawdown mechanics need to be synchronised so that the mezzanine doesn't draw ahead of the senior, and the cost overrun provisions need to be consistent across both facilities.

In this case, we also needed to ensure the blended cost of capital — senior plus mezzanine — didn't erode the developer's profit margin to the point where the scheme became unviable. Mezzanine rates are typically 12–18% per annum, so the structure needed to balance leverage against cost.

We produced a comprehensive development appraisal and capital structure model that demonstrated the deal worked for all parties — presenting the project and the borrower in the strongest possible light to both the senior lender and the mezzanine provider simultaneously. We placed £9.2m of senior debt at 7.2% per annum with a lender who had a proven track record of working alongside mezzanine providers. This was critical — we specifically avoided senior lenders known to be difficult on intercreditor negotiations, even where their headline rates were marginally lower.

The mezzanine facility of £5m was structured at 14% per annum, fully rolled up, from a specialist fund. Combined with the senior debt, total leverage reached 88% of costs — reducing the developer's equity requirement to just £1.95m, or approximately 12% of total costs.

We negotiated the intercreditor agreement directly, ensuring both parties were comfortable with the cure rights, reporting requirements, and drawdown sequencing. The mezzanine provider's profit participation was structured as a fixed return rather than a profit share, which the developer strongly preferred for certainty. The quality of our modelling and strategy gave both lenders the confidence to commit — and secured the best available pricing on each layer.

The fully structured capital stack of £14.2m was committed within eight weeks of initial instruction. Construction commenced on programme with both facilities drawing down in sync. The blended cost of debt across senior and mezzanine was approximately 9.6% per annum — manageable within the project's cashflow projections given the strong underlying margins.

The scheme completed in 20 months and achieved sales values 4% above the original appraisal. Total finance costs across both facilities were approximately £1.25m. The developer's return on their own equity of £1.95m was approximately 3x their investment — demonstrating the power of a well-structured capital stack in amplifying returns. By reducing the equity requirement from over £5m to just £1.95m, the developer freed capital to simultaneously pursue a second site.