Is mezzanine financing risky?

Mezzanine financing is a hybrid form of funding that sits between senior debt and equity in the capital stack. It allows developers and business owners to access additional capital without giving up equity or needing to refinance their entire facility. However, mezzanine debt financing does come with elevated risks, particularly for the lender and, to a lesser extent, the borrower.

From a lender’s perspective, mezzanine finance is riskier because it is subordinated to senior debt. This means that in the event of a default or forced sale, senior lenders get repaid first. As a result, mezzanine lenders often charge higher interest rates, typically ranging between 10-20%, to compensate for the increased exposure.

For the borrower, the risks of mezzanine finance usually relate to affordability. Since repayments (or rolled-up interest) can be expensive, a miscalculation in cash flow or development timelines may cause pressure on repayments. That said, mezzanine finance is often used by experienced developers who are confident in their project’s profitability and simply need to bridge a funding gap.

In the UK, mezzanine finance for property development is most commonly used when a developer needs to top up funds, either due to build cost overruns, extended project scope, or additional planning gains. It’s considered less risky when the scheme is already partially complete and the Loan to Gross Development Value (LTGDV) is still within acceptable thresholds, typically up to 80%.