Mezzanine and preferred equity

What a mezzanine provider assesses

A mezzanine provider underwrites the same scheme as the senior lender but from a riskier position, so it looks harder at the equity cushion beneath it and the headroom in the projected outcome. It wants a viable scheme with a credible developer, a sound senior facility already in place or being arranged alongside, whether that senior layer is a development loan or a bridging loan on a completed asset, and enough developer equity below the mezzanine that the layer is not exposed to the first loss. Track record weighs heavily here: an experienced developer with delivered schemes behind them clears the bar more easily, while a first-time developer is fundable where the senior structure is sound, the equity cushion is real and the team around them is proven. It assesses the projected profit or stabilised value against total cost, because its return and its capital both depend on the scheme delivering with margin to spare. The intercreditor position with the senior lender is central: the mezzanine provider needs agreed rights on ranking, payment and step-in if the scheme struggles. Because mezzanine ranks behind the senior debt and ahead only of the developer's equity, the provider prices for that risk and is selective about the schemes it backs. We package the appraisal, the senior structure and the equity position so the mezzanine case is credible, and we structure the intercreditor so the stack holds together.

How much a mezzanine layer adds and what it returns

Mezzanine and preferred equity raise total leverage above what the senior lender will advance alone. A senior development facility might fund indicatively 60 to 70 percent of cost; a mezzanine layer behind it can lift the combined total to indicatively 85 to 90 percent of cost, cutting the developer's cash requirement to the remaining 10 to 15 percent. The mezzanine itself is sized as the gap between the senior advance and the equity the developer will commit. In exchange for ranking behind the senior debt, the provider takes a higher return: a coupon at a higher interest rate than senior debt, an arrangement fee, and on some deals a share of the profit. Preferred equity is priced as a priority return ahead of ordinary equity. The arithmetic is a trade: more leverage and less developer cash, against a higher cost on the mezzanine slice, so it pays where the developer's equity is better deployed elsewhere or stretched across schemes. We model the stack, the blended cost and the effect on the developer's return. All bands are illustrative, vary by provider and scheme, are subject to principal sign-off, and are not an offer.

The cost of mezzanine against its effect on returns

Mezzanine finance is more expensive than senior debt and cheaper than giving away ordinary equity, which is the space it occupies. It costs a higher interest rate than the senior loan, plus an arrangement fee and sometimes a profit share, all reflecting that it ranks behind the senior debt and is repaid after it. The right question is not whether mezzanine is dear in isolation, which it is, but what it does to the developer's return: by reducing the cash committed, it can lift the return on the developer's own equity even after paying the mezzanine cost, and it can let limited equity fund more than one scheme. Where it destroys value is on a thin-margin scheme with little headroom, because the mezzanine cost then eats the profit. We model the blended cost of the whole stack and the effect on the developer's return, disclose our broker fee in writing, and never claim an exclusive panel or an exclusive tie to any provider. The figures are indicative and not an offer of finance.

Mezzanine, preferred equity and putting in more of your own equity

Filling the gap between the senior advance and total cost comes down to three routes: more developer equity, mezzanine debt, or preferred equity. Putting in more of your own equity is the cheapest in cash terms but consumes capital that could fund another scheme and concentrates risk in one project. Mezzanine debt preserves the developer's cash and ordinary equity, at the cost of a higher interest rate on the gap and a second-charge ranking behind the senior lender. Preferred equity also preserves ordinary equity but shares in the project company with a priority return rather than charging interest, which can suit the senior lender's intercreditor preferences or the tax position better. The right answer turns on how much cash the developer wants to keep free, the scheme's margin, and the senior lender's requirements. We model all three so the choice is made on the return each leaves the developer.