What is an example of a mezzanine financing?

A developer is building a block of 10 flats with a total development cost of £2 million and a projected Gross Development Value (GDV) of £2.8 million once complete.

A senior lender agrees to fund 70% of the GDV, offering a £1.96 million loan.

The developer only has £200,000 in personal capital.

This leaves a shortfall of £400,000 needed to cover the build costs and complete the project.

To bridge that gap, the developer secures mezzanine finance of £400,000 from a specialist lender. This mezzanine loan sits behind the senior loan, secured with a second legal charge on the property.

The mezzanine lender charges a higher interest rate, say 15% per annum, but rolls up the interest (i.e. it’s paid at the end).

When the development is sold, the senior loan is repaid first, followed by the mezzanine lender, and the developer keeps the remaining profit.

Why use mezzanine finance?

It allows the developer to:

• Keep full ownership and control
• Increase funding to 85-90% of GDV or up to 95% LTC (Loan to Cost)
• Avoid bringing in equity partners or giving up profit share

This example shows how mezzanine debt financing helps developers access higher leverage without selling equity or refinancing their entire facility.