Mezzanine and equity finance for industrial property

What is mezzanine finance and how does the capital stack work?

The capital stack is the order in which money enters a project and the order in which it is repaid. At the base sits senior debt, the development or investment loan, secured by first charge and repaid first. Above it sits mezzanine, junior debt on a second charge, repaid once the senior lender is clear. At the top sits equity, the first money at risk and the last repaid. Each layer carries more risk than the one below and prices accordingly: senior development debt from around 8 percent, mezzanine in the low to mid teens, equity expecting the highest return of all because it has no fixed claim.

Mezzanine earns its keep by shrinking the equity cheque. A developer building a 6 million pound trade park scheme with a senior facility at 70 percent of cost must otherwise find 1.8 million pounds in cash. A mezzanine layer to 87.5 percent of cost cuts that to 750,000 pounds, freeing capital for the next site or letting two schemes run in parallel. The trade is a more complex structure: the senior lender must consent to the second charge, the two lenders need an intercreditor agreement governing priorities and default, and the whole stack must still work if the programme slips. We negotiate all three layers so they hold together under pressure, not just on the appraisal.

What is the difference between a mortgage and a mezzanine loan?

A commercial mortgage, or any senior loan, is first-ranking debt: it takes a first charge over the property, it is repaid first from any sale or refinance, and because its position is the safest it carries the lowest rate, from around 6 percent on industrial investment debt. A mezzanine loan is deliberately subordinate. It takes a second charge, it is repaid only after the senior loan is cleared, and it exists precisely to occupy the risk territory the senior lender will not.

The two are complements, not alternatives. Mezzanine never replaces the senior facility; it stacks on top of one, governed by an intercreditor agreement that sets out what the junior lender may do if things go wrong, including, in most structures, the right to cure a senior default to protect its own position. It is also distinct from a bridging loan, which is short-term senior debt on a first charge used for speed or transition. Bridging substitutes for the senior layer for a period; mezzanine adds a layer above it to increase total leverage. They solve different problems and price differently.

How much can mezzanine add, and what does it cost?

Mezzanine facilities on industrial schemes typically run from 250,000 pounds to 10 million pounds and more, sized as the slice between the senior advance and around 85 to 90 percent of total cost. On acquisitions the same logic applies against the purchase price and the value: junior debt tops up a senior investment loan where the buyer's equity is the constraint. The ceiling on any given deal moves with the scheme's quality, the strength of the demand evidence, pre-lets or unit pre-sales already contracted, and the developer's record of delivering and letting similar space.

Pricing is typically in the low to mid teens, usually rolled up and settled at exit, with arrangement fees of 1 to 2 percent and sometimes an exit fee on larger facilities. Judged in isolation that looks expensive; judged across the stack it usually is not. A mezzanine coupon on a 15 to 20 percent slice of the funding, blended with senior development debt from around 8 percent on the rest, produces a total cost of capital well below what a profit-sharing equity partner would take for the same money on a successful scheme. That blended comparison, mezzanine against dilution, is the real decision, and we run it in pounds for every structure before you commit.

When does JV equity beat junior debt?

Debt, however stretched, must be repaid on a date with interest, and there are schemes where that rigidity is the wrong tool. A site bought ahead of planning, a speculative trade park in a catchment without contracted demand, or a sponsor whose cash is committed elsewhere may be better served by equity, which shares the downside rather than charging for it. In a typical industrial JV the developer contributes the site and the delivery, the partner funds the equity above the senior debt, and profits flow through a waterfall: partner's capital back first, then a preferred return, often 8 to 15 percent, then the remaining profit split, frequently with a promote that rewards the developer for outperformance.

The cost of that flexibility is permanent: the partner's share of a successful scheme will usually exceed what any mezzanine coupon would have cost, and partners expect approval rights over major decisions. The honest test is the slow case. If the scheme's returns absorb a rolled mezzanine coupon even when letting runs a year late, junior debt usually wins. If they do not, sharing the risk through equity is the safer structure, and pretending otherwise just relocates the problem to the worst possible moment. We structure both, and we tell you plainly which the numbers support.

What do junior lenders and equity partners want to see?

Everything the senior lender underwrites, examined harder, because the junior money stands behind it. On a development that means the total cost build-up and contingency, the contractor and the form of contract, planning and its conditions, and above all the demand evidence: comparable lettings and sales, named occupier interest, and any pre-lets to trade brands or logistics operators, or unit pre-sales to owner-occupiers, already exchanged. On an acquisition it means the tenancy schedule, the ERV against passing rent, the WAULT and the re-letting depth of the catchment, since the junior layer is repaid from the same income and exit as the senior, only later.

Both audiences underwrite the sponsor most of all. A junior lender or equity partner is backing delivery: schemes of this kind built and let before, an honest appraisal, meaningful cash of the developer's own in the deal, and a site contributed at a fair value rather than a flattering one. Alignment is the currency. We package the scheme to that standard, with the appraisal, programme, demand evidence and sensitivities ready, and we take it to the funds, family offices and specialist lenders whose appetite genuinely fits, because a well-prepared approach is usually the difference between a term sheet and a polite decline.