A Mezzanine Lender provides a layer of subordinated debt finance in a UK property development finance transaction, ranking below senior debt but above equity in the capital structure. Mezzanine funding typically fills a funding gap not covered by traditional lenders and may be secured by a second legal charge or structured as unsecured debt with equity-like features. In return for taking on more risk, mezzanine lenders often receive higher interest rates and sometimes profit participation. Their involvement can enhance project leverage while preserving developer equity.
In practice, a mezzanine lender often becomes involved where a developer seeks to reduce the amount of capital required from an Equity Investor while maintaining sufficient funding to complete acquisition, construction, or value enhancement works. The relationship between the mezzanine lender and the senior lender is typically governed by detailed intercreditor arrangements that define repayment priorities and enforcement rights. Because repayment depends on the project generating enough value after senior debt is discharged, mezzanine finance is generally associated with higher-risk developments and more complex capital structures. It is frequently encountered alongside Equity Kicker Mezzanine structures, where returns may be linked to project performance in addition to contractual interest payments.
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