Borrower Tips
Funding a property project typically involves a three-layer capital stack: senior debt, equity, and mezzanine finance.
Mezzanine finance is a powerful hybrid of debt and equity, sitting between these two layers. While it's more complex than traditional lending, it offers flexible capital for developers and higher returns for lenders, albeit with increased risk.
In today's challenging market, traditional funding often falls short. Developers face persistent pressures from rising material costs and fluctuating workloads, making comprehensive project finance critical.
That’s where mezzanine finance comes in: it bridges the gap between what a senior lender will offer and the equity a borrower can contribute.
In this article, you'll learn:
We'll also show how comparison platforms like Brickflow can help you source senior debt and mezzanine finance from a wide panel of lenders, making it easier to complete your capital stack with confidence.
Mezzanine finance is a hybrid funding solution blending characteristics of both debt and equity. It sits between senior debt (like a mortgage or commercial loan) and equity (the developer’s or investor’s own capital) in the capital stack. This is why it’s called "mezzanine," meaning "middle."
This structure is particularly useful when a project faces a funding gap. For example, if a senior lender won't cover a development’s full cost, and the developer wants to limit additional equity, mezzanine finance can bridge the shortfall.
This scenario is increasingly common. Recent Brickflow data highlights a tightening in traditional lending, with average leverage on residential development loans often sitting significantly lower than historical levels (for example, 66% compared to typical 70%+ in more stable periods). This shortfall often makes mezzanine finance a critical part of the funding mix.
While mezzanine loans carry higher interest due to their subordinated position, they help developers progress without diluting ownership, especially when used alongside senior debt.
Both mezzanine and bridging loans can plug funding shortfalls, but they serve different purposes and are structured differently:
In short, bridging is usually the primary funding solution for a time-sensitive acquisition. Mezzanine, however, is a complementary layer, helping complete the capital stack when senior debt and equity alone aren’t enough. To dive deeper into short-term solutions, explore the pros and cons of a bridging loan.
Not sure which is right for your project? Our team can help you compare funding options and structure the most efficient capital stack. Speak to a Brickflow specialist or use our bridging loan calculator to get started.
|
EQUITY
|
highest risk, last to be repaid |
|
MEZZANINE |
subordinated debt |
|
SENIOR DEBT
|
lowest risk, first to be repaid |
Where Mezzanine Finance Sits in the Capital Stack
The capital stack defines the hierarchy of funding for a property project. Each layer carries a different risk level and determines repayment order in the event of default.
Here’s a simplified breakdown:
Because mezzanine finance ranks below senior debt, it’s considered higher risk, commanding a higher return. However, it still ranks above pure equity, which assumes the greatest risk for the highest potential reward.
To formalise this structure, a deed of priority (also called an intercreditor agreement) is usually required. This legal document ensures all parties, especially the senior lender, agree on the repayment order and control terms if the borrower defaults.
Mezzanine finance sits behind senior debt in the repayment order. Its subordinated position means higher risk for the lender, leading to a higher cost for the borrower. To understand the specifics, let's explore how property development finance works, particularly with mezzanine finance.
A deed of priority (or intercreditor agreement) is required to formalise the repayment hierarchy, ensuring both lenders agree on who gets paid first if the borrower defaults.
Mezzanine capital can also be harder to source due to fewer active lenders. This is where platforms like Brickflow and DealLocker come in, providing a one-stop solution for accessing senior debt, mezzanine finance, and equity funding through a single application.
A typical mezzanine loan:
Mezzanine loans are generally repaid as a lump sum at the end of the term, offering developers more flexibility with cash flow during the project.
While some lenders may require monthly interest payments, more commonly, interest is rolled up and added to the loan balance. This reduces financial pressure during the build phase, especially when the asset won't generate income until completion or sale.
At the end of the term, the borrower makes a balloon payment, which includes:
Typical exit routes include:
This structure allows developers to focus capital on delivering the scheme before settling the mezzanine facility in full.
When senior debt isn’t enough to cover full project costs, developers typically choose between mezzanine finance and equity. Both options sit behind senior debt, but with very different trade-offs:
Using only mezzanine finance can over-leverage a project and increase repayment pressure. Going all-in on equity might protect cash flow, but it costs ownership and upside. Often, a blend of both offers the best of both worlds, balancing control, cost, and risk.
Yes, alternative structures can help developers raise additional capital without relying solely on mezzanine or equity:
These strategies can be complex to structure but are increasingly common for developers maximising leverage without losing control.
Need help structuring your capital stack? Brickflow and DealLocker make it easy to compare senior debt, mezzanine finance, and alternative solutions, all through a single digital application.
Mezzanine finance is a powerful tool, but one best used by experienced developers or businesses with a clear exit strategy and access to additional capital. For a broader understanding of project viability, consider the pros and cons of property development itself.
Unlike senior debt, mezzanine finance is often more flexible in structure and repayment:
This flexibility frees up working capital, helping borrowers:
Mezzanine lenders often take a commercial view on deal structures, especially with experienced teams, making this funding well-suited to ambitious growth plans.
Because mezzanine loans are subordinated (repaid after senior debt), they carry more risk for the lender. In return, some lenders ask for a share of the project’s profits, known as profit participation, in addition to regular interest payments. This allows lenders to benefit from the project’s success without taking equity ownership.
Profit participation is a contractual arrangement, not a shareholding. The lender doesn’t own part of the development but may receive:
Example: A mezzanine lender agrees to a 12% interest rate plus 10% of net profit. If the project is highly profitable, the lender earns more than interest alone. If it underperforms, they still receive the fixed return but little or no profit share.
| Feature | Mezzanine with Profit Participation | Equity Investor |
|---|---|---|
| Ownership | No | Yes – holds a share of the business |
| Control/Influence | Limited or none | May have voting rights |
| Repayment | Fixed timeline (e.g., loan term) | No guaranteed repayment date |
| Return Basis | Interest + profit share | Dividends or capital gains |
| Seniority | Above equity, below senior debt | Last to be repaid |
In short, profit participation gives mezzanine lenders potential upside without requiring the borrower to give up equity or control. It’s a smart way to align both parties’ interests in the project's success.
In the UK, mezzanine finance is provided by a wide range of sources, including:
These lenders often operate through intermediaries or platforms that specialise in property finance, making it easier for developers to access funding beyond the traditional bank route.
Securing finance for property development is complex, especially when you’re trying to pull together senior debt, mezzanine funding, and possibly even equity. Traditional routes are slow, fragmented, and often stacked against the borrower.
Brickflow changes that. We’re the UK’s first search engine for commercial property finance, giving developers access to over 100 lenders through one digital platform.
| Benefit | What It Means for You |
|---|---|
| More funding options | Tap into both senior debt and second-charge lenders |
| Faster deal completion | One digital application speeds up the process |
| Complete capital stack | Structure deals from top to bottom in one workflow |
| Transparent process | Retain control while receiving competitive proposals |
One of the most efficient ways to access mezzanine finance is through Brickflow’s partnership with DealLocker, a curated digital marketplace that connects developers with second-charge and equity investors.
Brickflow is the UK’s first search engine for commercial property finance. Through its integration with DealLocker, it offers:
Find out more about navigating complex project funding through Brickflow and DealLocker.
| Advantages | Disadvantages |
|---|---|
| Increased leverage: Fund larger projects with less equity | Higher cost: Interest rates are significantly above senior debt |
| Ownership retention: Avoid giving away equity | Subordination risk: If the project fails, mezzanine lenders are at greater risk |
| Flexible structure: Custom repayment terms | Strict eligibility: Often only available to experienced developers with strong track records |
| Access to complex projects: Especially useful when senior lending is conservative |
Mezzanine finance is most commonly used in property development and investment, where it helps plug funding gaps left by increasingly conservative senior lenders.
In a high-interest rate, low-leverage environment, developers are asked to contribute more equity. This often prompts the question of how much money you really need for property development, and can limit their ability to scale or even get projects off the ground.
Used to cover land acquisition and build costs when senior loans don’t stretch far enough. You can learn more about the development finance process here.
Helps fund the purchase or refinance of income-generating assets, particularly when senior lenders cap LTVs.
Let’s say a borrower is developing a scheme with a Gross Development Value (GDV) of £10 million and build costs of £7 million.
| Factor | High Leverage + Lower Pricing | Low Leverage + Higher Pricing (Current Market) |
|---|---|---|
| Max LTGDV | 65% | 55% |
| Max LTC | 80% | 65% |
| Interest Rate | 6% p.a. | 8% p.a. |
| LTGDV Limit | 65% x £10m = £6.5m | 55% x £10m = £5.5m |
| LTC Limit | 80% x £7m = £5.6m | 65% x £7m = £4.55m |
| Developer Equity Required | £7m - £5.6m = £1.4m | £7m - £4.55m = £2.45m |
In this scenario, the borrower would need to find an extra £1.05 million in equity in the "Low Leverage" market. That’s where mezzanine finance becomes critical, covering the shortfall so the developer can proceed without stalling or over-diluting their position.
Example: If senior debt covers 70% of project costs, mezzanine finance might plug 20%, reducing the developer’s equity input to just 10%. Mezzanine funds typically land on day one, alongside the borrower’s own equity.
While less common in this context, mezzanine finance can also be used for:
To fund part of the purchase price when senior debt and retained earnings aren’t enough, without giving away equity.
To support growth initiatives like buying equipment or facilities when traditional borrowing limits are maxed out.
In both cases, mezzanine is often used after cheaper options are exhausted, usually by businesses with reliable cash flow and strong repayment potential.
Securing property finance is complex, especially when you’re trying to pull together senior debt, mezzanine funding, and possibly even equity. Traditional routes are slow, fragmented, and often stacked against the borrower.
Brickflow changes that. We’re the UK’s first search engine for commercial property finance, giving developers access to over 100 lenders through one digital platform.
Whether you're building from the ground up or refinancing an investment, we help you:
Ready to run your numbers? Use Brickflow’s development finance calculator to see what your project could secure, in minutes, not weeks.
Mezzanine debt significantly boosts your financing strategy. It lets you take on more projects without tying up all your capital. While it's pricier than senior debt, its flexibility ensures you can complete your capital stack and accelerate development, ultimately aiming for better returns.
For UK property projects, the best place to compare mezzanine finance is with Brickflow. We give you instant access to live rates and terms from over 100 specialist lenders. Quickly model deals, compare offers, and find the perfect mezzanine solution, all in one place.
No, mezzanine finance isn't typically for first-time developers in the UK. It's a higher-risk, higher-cost solution, best suited for experienced developers with a proven track record, solid financials, and a clear exit plan for their projects.
For UK residential or commercial schemes, mezzanine funding usually costs 10-20% interest per annum. This higher rate reflects the increased risk, as it sits behind senior debt. Some deals might also include a profit share for the lender, known as an "equity kicker."
Brickflow simplifies property development finance. Our platform connects you to a wide panel of specialist lenders, including mezzanine providers. You can model scenarios, compare offers, and streamline your application, often getting a decision in principle in minutes, not weeks, for your full capital stack.
The fastest way to get a decision on mezzanine finance for a UK property development is through a digital platform like Brickflow. By submitting a single application, you can access multiple lenders and equity investors via our DealLocker integration, speeding up comparisons and funding decisions dramatically.
A UK developer should pick mezzanine finance over more equity if they want to keep more ownership and maximize their potential profits. It's a strategic move to stretch your existing equity across multiple projects, providing vital capital without diluting your control or future returns.
Brickflow brings full transparency to mezzanine finance sourcing. Our digital marketplace lets you compare live loan terms and proposals directly from over 100 specialist lenders. You stay in control, seeing all competitive offers clearly, making informed decisions easier.
In UK mezzanine finance, a deed of priority (or intercreditor agreement) is vital. This legal document clearly defines the repayment order for all lenders. It ensures everyone agrees who gets paid first if a borrower defaults, protecting the positions of both senior and mezzanine lenders.
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