In property development, having your equity tied up in a site can limit your ability to progress with other projects in the pipeline as you struggle to recycle capital. This is where Mezzanine Finance equips developers with the tools needed to stretch their equity further, taking on larger projects or running multiple sites simultaneously.
Silver Oak Capital specialises in stacking the capital stack. We can layer mezzanine finance on top of the senior debt to maximise your Return on Equity (ROE).
Mezzanine finance is a junior loan that sits behind the senior debt but ahead of your own equity. It is effectively a “top-up” loan.
The Capital Stack
Because the Mezzanine lender is in a second charge position (meaning they only get paid after the senior lender if things go wrong), the risk is higher, and therefore the interest rate is higher than the senior facility.
Even if you have the cash, using it all on one site can be economically inefficient. By using mezzanine finance to reduce your deposit on Site A, you keep cash free to put a deposit on Site B. It allows you to build two schemes simultaneously for the equity cost of one.
Mezzanine finance is complex because it involves an agreement between three parties: the developer, the senior lender, and the mezzanine lender.
This is the legal document that governs the relationship between the two lenders. The senior lender must give permission for the mezzanine lender to take a second charge. Not all senior lenders allow this, however with our market coverage and strong relationships, we know which lenders work well together.
Mezzanine rates can range from 12% to 18% per annum. While this sounds expensive, it is important to consider the blended rate (the average cost taken across the senior debt and mezzanine finance).
Like senior debt, mezzanine interest is usually rolled up and paid at the end and therefore it does not impact your monthly cash flow.
The biggest cause of delays in mezzanine deals is legal friction between the two lenders. We pair senior lenders and mezzanine lenders who have worked together before and have pre-agreed intercreditor deeds. This saves weeks of legal arguments and thousands in legal fees.
Our goal is to get your personal cash contribution as low as possible. By aggressively structuring the mezzanine layer, we can often reduce your input to just 10% of the scheme’s total costs. In some exceptional cases with additional security, we can achieve 100% funding (0% cash in).
Some mezzanine lenders ask for a “Profit Share” or “Equity Kicker” in addition to the interest. We can negotiate to minimise or remove these clauses, ensuring you retain the maximum amount of the development profit for yourself.
Generally, Mezzanine lenders have a minimum loan size, often around £150,000 – £250,000. This means the total project usually needs to be worth over £1.5m to make mezzanine finance viable. For smaller projects, a simple senior facility is usually more cost-effective.
No. They usually rely on the Monitoring Surveyor (MS) appointed by the senior lender. They will read the monthly reports to ensure the project is on track, but they rarely get involved in day-to-day decisions unless the project goes significantly over budget or over time.
No. Mezzanine finance is a form of debt where you pay a fixed interest rate and keep all the remaining profit. JV Equity is a partnership – the partner puts up the money but typically takes 50% of the profits. If your project is highly profitable, mezzanine finance is usually cheaper than giving away half your profit.