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Both structures get a project to roughly the same leverage. The difference is how many lenders are involved and how the cost is spread.
A worked example
Total development cost $10 million. The developer wants to fund $7.5 million with debt.
| Senior plus mezzanine | Stretched senior | |
|---|---|---|
| Senior | $6.0m at 8.5% | $7.5m at 10.25% |
| Mezzanine | $1.5m at 16% | none |
| Blended rate | 10.0% | 10.25% |
| Establishment fees | Two lenders | One lender |
| Legal costs | Two facilities plus intercreditor deed | One facility |
| Valuers and QS | Often duplicated | One set |
These are illustrative rates. On the interest line the two are within a quarter of a percent. Add the second establishment fee and the extra legal work and the single loan is frequently level or ahead. Because development loans are drawn progressively, the real interest bill also depends on which layer is drawn first. Mezzanine is often drawn early, so its higher rate runs for longer.
Where mezzanine wins
- A cheap senior facility is already approved. Replacing it would cost more than adding a layer behind it.
- The gap is small. A modest mezzanine piece on top of bank pricing keeps the blended rate low.
- Leverage above stretched senior limits. Mezzanine can take total debt to around 85% of cost, further than a single first mortgage lender will go.
Where stretched senior wins
- No senior lender yet. One approval is faster than two that must be aligned.
- The bank will not permit a second mortgage. Many will not.
- Limited presales. Non-bank senior lenders are more flexible on presales than banks.
- Time pressure. Settlement on the site is close and there is no room to negotiate an intercreditor deed.
Control if things go wrong
With two lenders, a default brings two parties with different priorities. The senior lender wants to be repaid. The mezzanine lender may want to step in and finish the project to protect its position. The intercreditor deed decides who can do what, and the developer has little say. With one lender there is one conversation.
How to decide
Ask for both structures to be costed on the same feasibility, with fees, line fees on undrawn funds and the drawdown schedule included. Compare total finance cost over the life of the project, and the equity each leaves you to contribute. Start with development finance for the senior layer and read what is stretched senior debt for the single loan option.
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Get matched with a funderFAQ
What is an intercreditor deed?
An agreement between the senior and mezzanine lenders that sets priority, limits what the junior lender can do on default and governs how proceeds are shared. It takes time and legal cost to negotiate.
Will my senior lender allow mezzanine behind it?
Not always. Many banks restrict or prohibit second-ranking debt. Check the facility terms before arranging a mezzanine layer.
Can I add mezzanine part way through a build?
Sometimes, if the senior lender consents. It is easier to set the structure at the start.