Mezzanine finance explained

Mezzanine finance is junior debt that sits between the senior loan and the borrower's equity in the capital stack. It tops up the senior facility so the borrower commits less cash to the deal, and in return the mezzanine lender accepts a riskier, second-ranking position and charges a materially higher rate, typically in the low to mid teens for UK property mezzanine. On a development or a heavy refurbishment it is the most common way to stretch total funding from around 60 to 65 percent of cost up to 80 or even 90 percent.

This guide explains what mezzanine finance is, where mezzanine debt sits in the capital stack, how a mezzanine loan works in a UK property deal, what it costs, the security and intercreditor mechanics behind it, how it compares with senior debt and equity, when developers use it, and the risks. We use industrial and logistics property, the distribution warehouses, multi-let estates, trade counters and workshops we arrange finance for every week, as the running context. We arrange mezzanine and equity alongside senior facilities as a broker and introducer. We are not a lender, and nothing here is financial, legal or tax advice.

What is mezzanine finance?

Mezzanine finance is a second layer of debt that ranks behind the senior lender and ahead of the equity. The name comes from the mezzanine floor of a building, a level inserted between two others, and in funding terms it occupies exactly that position: slotted between the cheap, well secured senior loan at the bottom of the capital stack and the expensive, exposed equity at the top.

Because the mezzanine lender is only repaid after the senior lender has been made whole, mezzanine debt carries more risk than senior debt and is priced accordingly. It is still debt, though. There is a loan agreement, an interest rate that is usually rolled up rather than serviced, a repayment date and security. Some corporate mezzanine structures include warrants or equity options that give the mezzanine provider a share of the upside, which is why mezzanine capital is often described as a hybrid of debt and equity. In UK property deals the conversion feature is rare; most property mezzanine is a straightforward second-ranking loan, occasionally with a small profit share attached.

The practical purpose of mezzanine finance is leverage. A developer with three viable industrial schemes and enough cash for one can use mezzanine to spread that cash across all three, accepting a higher blended cost of capital in exchange for doing more deals at once. Who provides it matters too: UK property mezzanine comes from specialist debt funds, family offices, private investors and a handful of banks willing to hold junior positions, rather than from the high street. Each mezzanine provider has its own appetite for sectors, regions, minimum loan sizes and intercreditor terms, and the market moves constantly, which is why mezzanine is overwhelmingly an introduced and arranged product rather than one borrowers source directly.

Where does mezzanine debt sit in the capital stack?

The capital stack is the order in which the money funding a deal is repaid. At the bottom sits senior debt, typically a development facility or commercial mortgage secured by a first legal charge. It is repaid first, carries the least risk and therefore the lowest rate, with senior term lending on industrial property indicatively priced from around 6 percent and development money from around 8 percent in the current market. At the top sits the equity, the borrower's own cash, which is repaid last, absorbs the first loss and takes whatever profit remains. Mezzanine sits in the middle.

On a typical UK development the senior lender funds around 60 to 65 percent of total cost. The mezzanine lender then advances a further 15 to 25 percent of cost, taking total debt to around 80 to 90 percent, and the developer funds the remainder as equity. Repayment runs strictly up the stack: when the scheme is sold or refinanced, the senior loan and its interest clear first, then the mezzanine loan and its rolled-up interest, and only then does the equity come back with any profit.

That ranking is the entire economics of mezzanine finance. If the scheme outperforms, the mezzanine lender still only earns its agreed return while the equity takes the upside. If the scheme underperforms, the equity is consumed before the junior lender loses a pound, and the junior slice is consumed before the senior lender loses anything. Risk and reward both scale with height in the stack, and pricing follows.

How does mezzanine finance work in a UK property deal?

In practice a mezzanine loan is arranged alongside, not after, the senior facility. The mezzanine lender underwrites the same scheme the senior lender does: the site, the planning consent, the cost plan, the contractor, the borrower's track record and the exit. On a development the two facilities draw down in a set order against certified costs, with the equity usually going in first, then the mezzanine, then the senior loan, so the cheapest money is the last in and the first out.

Interest on property mezzanine is almost always rolled up, because a development site or a vacant industrial unit produces no income to service it. Nothing is repaid until the exit, when the completed scheme is sold or refinanced onto term debt. That makes the exit the centre of the credit assessment: a mezzanine lender funding a small-unit industrial scheme will test the sales or letting assumptions, the refinance market and the timetable at least as hard as the senior lender, because every month of delay compounds at the mezzanine rate.

The legal framework that holds the two loans together is the intercreditor agreement, the contract between senior and mezzanine lenders that ranks their claims and governs behaviour on default. Expect the full process, both credit approvals and the legal negotiation, to take somewhat longer than a senior-only deal, and budget for it in the programme. Arranging a stacked facility therefore means running two credit processes and a three-way legal negotiation, which is precisely where a broker earns its fee. We pair senior lenders with mezzanine providers they have signed intercreditor terms with before, alongside the development finance itself, which removes most of the friction.

1. Underwrite the scheme twice

   Both the senior and mezzanine lenders test the site, the planning consent, the cost plan, the contractor, the track record and the exit. The mezzanine lender scrutinises the exit at least as hard, because its money is the first debt lost.

2. Agree the intercreditor terms

   Senior and mezzanine lenders negotiate who is paid what and when, default behaviour and standstill periods. Pairing lenders who have signed intercreditor terms together before removes most of the friction.

3. Draw down in order

   On a development the equity usually goes in first, then the mezzanine, then the senior loan, so the cheapest money is the last in and the first out against certified costs.

4. Roll up interest to the exit

   A development site or vacant unit produces no income to service the loan, so mezzanine interest accrues and compounds until the completed scheme is sold or refinanced onto term debt.

What does mezzanine finance cost?

Property mezzanine in the UK indicatively prices in the low to mid teens a year, against senior term debt from around 6 percent and senior development money from around 8 percent. The exact rate depends on how high the mezzanine pushes total leverage, the strength of the scheme and the borrower's record. Stretching from 65 to 75 percent of cost is cheaper than stretching from 75 to 90 percent, because the last slice of debt is the most exposed slice. Sector and evidence move pricing as well: a pre-let or pre-sold industrial scheme with strong comparable rents borrows mezzanine more cheaply than a speculative project in a thin market, because the exit the junior loan relies on is already partly contracted.

On top of the coupon, expect an arrangement fee of around 1 to 2 percent, often an exit fee of similar size, and higher legal costs than a senior-only deal because the intercreditor agreement adds a third set of lawyers. Some mezzanine structures swap part of the coupon for a small share of scheme profit, which lowers the fixed cost but gives away upside. All of these figures are indicative rather than quotes, and they move with the market.

The right way to judge mezzanine cost is on blended return on equity, not the headline rate. Paying a mid-teens rate on a junior slice while releasing several hundred thousand pounds of equity into a second profitable scheme is frequently better business than leaving that equity locked in one deal. We model the stack both ways before recommending mezzanine to a client, because sometimes the honest answer is that a higher-leverage senior loan or a cheaper stretch facility beats it.

What security does a mezzanine lender take?

A property mezzanine lender typically takes a second legal charge over the property, ranking behind the senior lender's first charge, plus a debenture over the borrowing company and usually a charge over the shares in that company. The share charge matters: if the deal fails, the junior lender can step in and take control of the company that owns the scheme, complete it and protect its position, rather than waiting passively behind the senior lender in an enforcement process.

Personal guarantees are common, often capped at a percentage of the mezzanine loan, and on development deals the junior lender will expect the same cost overrun and completion support the senior lender requires. Some senior lenders refuse second charges altogether; in those structures the mezzanine sits as a loan into a holding company above the borrower, secured only on shares, which is a weaker position and priced accordingly.

The intercreditor agreement is the document that makes the whole structure work. It sets who is paid what and when, what happens on default, whether the junior lender can cure a senior default to protect itself, and how long it must stand still before enforcing its own security. Senior lenders vary widely in the intercreditor terms they will accept, and matching the two lenders is a large part of the value an arranger adds.

Mezzanine vs senior debt vs equity: what is the difference?

Senior debt is the cheapest and safest layer. It holds the first charge, is repaid first, and in the current market prices from around 6 percent for term lending on a let industrial investment, with leverage typically capped at around 65 to 70 percent loan to value. Its weakness, from the borrower's side, is exactly that cap: a senior lender will not normally fund the last quarter of a deal's cost, however good the scheme.

Equity is the most expensive layer because it takes the first loss and has no contractual right to a return at all. A joint venture or equity partner will usually want a substantial share of profit, a say in decisions and detailed reporting. Preferred equity sits between the two: it is an investment rather than a loan, takes no charge over the property, and relies on rights in the shareholders' agreement, with a priority return that usually prices above mezzanine and below a full profit share.

Mezzanine finance is the bridge between those positions. It is cheaper than equity because it ranks ahead of it and carries security; it is dearer than senior debt because it ranks behind it. The practical hierarchy for a borrower is to maximise sensibly priced senior debt first, fill the remaining gap with mezzanine where the senior lender will tolerate junior debt, and reach for preferred equity or a joint venture where the gap is really risk capital rather than debt. We arrange all three layers through our mezzanine, equity and JV service and set the answer deal by deal.

When do developers use mezzanine finance?

The classic mezzanine user is an experienced developer whose ambitions have outgrown their balance sheet. Across the industrial and logistics market that profile is everywhere, from distribution and last-mile schemes to small-unit and trade counter terraces in chronic undersupply: sites are contested, build budgets are large, and a developer who can run three schemes instead of one wants to. Mezzanine on the second and third projects, sized against the equity released from the first, is how many industrial and logistics developers scale.

Mezzanine also appears on heavy refurbishments of tired multi-let industrial estates, where the spend on roofs, power and EPC upgrades is large relative to the day-one value, and on site assemblies where the senior lender will fund the land but not the planning risk. Construction costs sharpen the case: with warehouse build costs running at around £1,100 to £1,220 per sq m on Costmodelling Limited's typical UK building cost data rebased to April 2026, even a modest small-unit scheme carries a seven-figure build budget, and the equity cheque at 65 percent senior leverage is substantial. Specialist development funders such as our sister advisory Construction Capital see the same pattern across every asset class: mezzanine demand follows build cost inflation.

Mezzanine makes sense when the projected profit comfortably exceeds the extra cost of the junior debt, when the developer has a genuinely better use for the equity it releases, and when the exit holds under conservative assumptions. It makes much less sense as a rescue for a deal that does not work at sensible leverage, as a way to outbid the market for a site, or as a substitute for equity the borrower simply does not have. Mezzanine lenders read appraisals carefully and price desperation quickly. Lender expectations are also higher up the stack, not lower: a mezzanine provider will want the same feasibility evidence as the senior lender, a demonstrable track record or an experienced delivery partner, real cash equity in the deal, and an exit that survives conservative assumptions, because its money is the first debt lost if the plan slips.

What are the risks of mezzanine finance?

For the borrower, the main risk is leverage itself. At 85 to 90 percent of cost there is very little margin for error: a build cost overrun, a slow planning discharge, a valuation that comes in light or a slower letting campaign can consume the entire equity cushion and leave the developer working for the lenders. Rolled-up interest compounds the problem, because every month of delay adds cost at the mezzanine rate, not the senior rate.

Refinance risk sits underneath that. Most property mezzanine is repaid by a sale or a refinance onto term debt, and the refinance depends on the completed asset letting at the rents the appraisal assumed. A small-unit scheme that reaches practical completion into a soft letting market may not support enough senior debt to clear the mezzanine, forcing an extension at penal rates or a fresh equity injection. Stress testing the exit at lower rents and softer yields, before signing, is the discipline that separates good mezzanine borrowing from bad.

Two further points belong in any honest account. Execution takes longer than a single senior loan, because there are two credit processes and an intercreditor negotiation, so the mezzanine conversation should start alongside the senior process, not after it. And on regulation: mezzanine lending to companies for business purposes is generally not regulated by the Financial Conduct Authority, although a loan secured on or near a borrower's home can be a regulated mortgage contract, and we will always say where a proposal sits before anything proceeds.

A worked mezzanine example

The following figures are illustrative only, not a quote or an offer of finance. Suppose a developer is building a 55,000 sq ft scheme of small industrial units with total costs of £8 million including land, construction, fees and finance. A senior development lender offers 65 percent of cost, £5.2 million, indicatively priced from around 8 percent with interest rolled up. Without mezzanine the developer must find £2.8 million in cash.

A mezzanine lender then advances a further £1.6 million behind the senior facility, taking total debt to £6.8 million, 85 percent of cost. The developer's equity requirement falls to £1.2 million. The mezzanine prices illustratively at 14 percent annualised, rolled up, with a 2 percent arrangement fee. Over a 15 month build and sales period the mezzanine interest and fees add roughly £320,000 of cost to the scheme.

If the completed scheme sells for £10 million, the senior loan and its interest repay first, the mezzanine loan and its rolled-up interest repay second, and the developer's £1.2 million of equity returns with the remaining profit. The profit is lower than it would have been without the mezzanine, but the return on the cash actually employed is far higher, and £1.6 million of equity was free to work in the next scheme throughout. That is the mezzanine trade in one paragraph: a thinner margin on a much smaller cheque. Run the same example with a six month delay and a 5 percent sales shortfall before committing, because the structure that looks comfortable in the base case has to remain survivable in the bad one.