Question 1

What is mezzanine finance in property development?

Accepted Answer

Mezzanine finance is a secondary layer of debt that sits behind the senior (first charge) loan in the capital structure. It is secured by a second charge on the development property and bridges the gap between what the senior lender provides (typically 60-70% of costs) and the total funding required. For Wandsworth development projects, mezzanine finance typically fills the gap between 65-70% LTC (senior debt) and 85-90% LTC (combined), reducing the developer's cash equity requirement from 30-35% to as little as 10-15% of total project costs.

Question 2

How much can mezzanine finance reduce my equity contribution?

Accepted Answer

With senior debt typically providing 65-70% of total costs and mezzanine finance providing an additional 15-25%, the combined leverage can reach 85-90% of total project costs. This means your cash equity contribution can reduce from 30-35% (with senior debt alone) to just 10-15% of costs. For a typical Wandsworth development with £3 million in total costs, this reduces your equity requirement from approximately £900,000-£1,050,000 to £300,000-£450,000 — freeing up significant capital for other projects or investments.

Question 3

What are typical mezzanine finance rates in Wandsworth?

Accepted Answer

Mezzanine finance rates for Wandsworth development projects typically range from 1.0% to 1.5% per month (12-18% per annum), with arrangement fees of 2-3% of the mezzanine facility. Rates are higher than senior debt because the mezzanine lender takes a second charge position, meaning they face greater risk of loss if the project does not perform. The blended cost across senior and mezzanine combined is typically 0.80-1.0% per month. Despite the higher cost, mezzanine finance can significantly improve developer returns on equity by increasing leverage on profitable projects.

Question 4

What is an intercreditor agreement?

Accepted Answer

An intercreditor agreement (ICA) is a legal document that governs the relationship between the senior lender and the mezzanine lender. It establishes the rights and obligations of each party, including the order of repayment (senior debt is always repaid first), the circumstances under which the mezzanine lender can enforce their security, information sharing requirements, and consent mechanisms for any amendments to the facility terms. The ICA is essential because the mezzanine lender's second charge is subordinate to the senior lender's first charge. Negotiating the ICA can sometimes add 1-2 weeks to the overall transaction timeline.

Question 5

Can I get mezzanine finance without the senior lender's consent?

Accepted Answer

No. Because the mezzanine lender takes a second charge behind the senior lender, the senior lender must consent to the mezzanine facility and agree to the terms of the intercreditor agreement. Many development lenders are accustomed to working alongside mezzanine providers and have standard ICA templates. However, some senior lenders — particularly certain banks — may not permit mezzanine finance or may have restrictions on the amount of secondary debt allowed. We identify senior lenders who are comfortable with mezzanine from the outset, ensuring a smooth process for Wandsworth projects.

Question 6

When should I use mezzanine finance vs stretched senior debt?

Accepted Answer

Mezzanine finance and stretched senior are both routes to higher leverage, but they suit different situations. Stretched senior provides higher leverage (typically 75-80% LTC) through a single facility with one lender, making it simpler and cheaper. Mezzanine finance, combined with standard senior, can achieve 85-90% LTC — higher leverage than stretched senior. Choose stretched senior when you need moderate additional leverage and value simplicity. Choose mezzanine when you need maximum leverage and the higher combined cost of capital is justified by the project's margins. For Wandsworth schemes with strong GDVs and healthy profit margins (20%+ on cost), mezzanine typically delivers superior returns on equity.

Question 7

What is the minimum project size for mezzanine finance?

Accepted Answer

Most mezzanine lenders have minimum facility sizes of £150,000-£250,000, which typically corresponds to total project costs of at least £1-1.5 million. Below this threshold, the fixed costs of arranging mezzanine (legal fees, intercreditor agreement, due diligence) become disproportionate to the facility size. For smaller Wandsworth projects under £1 million in total costs, stretched senior finance is usually a more efficient route to increased leverage, as it avoids the additional costs and complexity of a separate mezzanine facility.

Question 8

How is mezzanine finance drawn down?

Accepted Answer

Mezzanine finance is typically drawn in full at the point of facility completion, alongside the initial drawdown of the senior debt. Unlike senior debt, which is drawn in stages against QS certifications, the mezzanine sits as a lump sum from day one. Interest on the mezzanine is rolled up (added to the facility) and repaid alongside the principal when the project is sold or refinanced. Some mezzanine lenders may structure their facility to draw in tranches, but the full-draw-at-completion model is by far the most common in the Wandsworth development market.

Question 9

What happens if my project runs into difficulty?

Accepted Answer

If a development project encounters difficulties — whether cost overruns, delays, or market changes — the intercreditor agreement governs how the situation is managed. The senior lender has priority in all enforcement actions. The mezzanine lender typically has the right to be informed of any defaults and may have the option to step in and cure defaults (for example, by providing additional funding) to protect their position. In a worst-case enforcement scenario, proceeds from any sale are used to repay the senior lender first, with the mezzanine lender only recovering from the surplus. This waterfall structure is why mezzanine carries higher rates — and why strong Wandsworth GDVs provide important comfort to mezzanine providers.

Question 10

Can first-time developers access mezzanine finance?

Accepted Answer

Mezzanine finance is more readily available to experienced developers with a proven track record. First-time developers may find it challenging to secure mezzanine separately, as providers want confidence in the borrower's ability to deliver. However, some mezzanine lenders will support first-time developers if: the senior lender has already approved the deal (providing validation), the developer has strong professional experience in a related field, the project team (contractor, QS, architect) is highly experienced, the scheme has detailed planning consent, and the Wandsworth location supports strong end values. Alternative routes for first-timers include JV equity or stretched senior debt.

Question 11

How does mezzanine finance affect my overall development returns?

Accepted Answer

Mezzanine finance increases your total cost of capital but can significantly improve your return on equity (ROE) through the effect of leverage. For example, consider a Wandsworth project with £3M costs and a £3.75M GDV (25% margin on cost). With senior debt only at 70% LTC, your £900K equity generates a £750K profit — an 83% ROE. Adding mezzanine to reach 90% LTC reduces your equity to £300K. After paying additional mezzanine interest (approximately £90K on a £600K facility over 15 months at 1% pm), your net profit is £660K on £300K equity — a 220% ROE. The higher cost of mezzanine is more than offset by the reduced equity base, provided the project is profitable.

Feature	Mezzanine + Senior	Stretched Senior
Maximum LTC	85-90%	75-80%
Number of Lenders	Two (senior + mezzanine)	One (single facility)
Security Structure	First charge (senior) + second charge (mezzanine)	First charge only
Intercreditor Agreement	Required (adds time and cost)	Not required
Blended Rate	0.80-1.0% pm (blended)	0.85-1.0% pm
Legal Complexity	Higher (two sets of documentation)	Lower (single facility agreement)
Total Legal Fees	Higher (two lender legals)	Lower (one set of fees)
Minimum Equity	10-15%	20-25%
Best For	Maximum leverage on high-margin schemes	Moderate leverage with simplicity

Mezzanine Finance in Wandsworth

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What is Mezzanine Finance?

How Mezzanine Fits in the Capital Stack

Senior Debt Only

Senior + Mezzanine

Mezzanine Finance vs Stretched Senior

Choose Mezzanine When:

Choose Stretched Senior When:

The Intercreditor Agreement Explained

Payment Waterfall

Enforcement Rights

Standstill Provisions

Consent and Information Rights

When is Mezzanine the Right Choice?

Mezzanine Finance FAQs

Related Services and Resources

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Development Finance Calculator

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