Mezzanine Finance in Property
Mezzanine finance is a hybrid of debt and equity financing that sits between the senior debt (first charge) and the developer's own equity, often used to bridge funding gaps.
In large-scale property developments, a primary lender (senior debt) might only fund up to 60-65% of the Gross Development Value (GDV). If the developer does not have enough of their own cash to cover the remaining costs and deposit, they may seek Mezzanine Finance.
Mezzanine finance acts as a top-up loan. It sits as a 'second charge' behind the main lender. Because the mezzanine lender takes on much higher risk (they are second in line to get paid if the project fails), mezzanine debt carries a significantly higher interest rate, and the lender may also demand an equity stake (profit share) in the project.
Use Case
Despite the high cost, developers use it because it drastically reduces the amount of their own capital required, allowing them to undertake much larger projects or spread their cash across multiple sites simultaneously.