A mezzanine loan is a form of subordinated property development finance that blends features of both debt and equity. It typically sits behind the senior lender with a second charge and provides developers with additional funds while reducing the amount of equity required. Mezzanine finance may be structured with fixed interest, an equity kicker, or other mechanisms to increase returns for the lender due to the higher risk. In the UK, mezzanine loans are widely used on schemes with strong profitability where the capital stack needs extending without diluting ownership.
Within the capital stack, a mezzanine facility is typically positioned under Subordinated Debt 2nd Charge, reflecting its junior ranking behind senior debt and its reliance on residual project value for repayment. It is often evaluated alongside Preferred Debt, as both provide supplementary leverage with similar return expectations and risk exposure. In practice, mezzanine lenders are subject to intercreditor arrangements, frequently incorporating provisions such as Subrogation to define recovery rights. From a credit perspective, servicing capacity is closely monitored using measures like Interest Coverage, particularly where rolled-up or partially serviced interest structures are in place.
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