Senior debt, stretch-senior, mezzanine and equity each do a different job in a development. How the layers fit together, what each one costs the scheme in complexity, and why the senior lender reads the whole stack.
The capital stack of a development is the order in which its funding is repaid: senior debt first, then any subordinated debt, then equity. It is not a fixed template. It has to be calibrated to the risk of the scheme, and getting that calibration right decides whether a project is financeable at all.
Senior Debt: The Foundation
Senior development finance typically covers up to around 60% of gross development value and up to around 85-90% of construction costs, indicatively priced between 8% and 11% per annum. Both limits apply at once, and whichever binds first sets the facility. Land is commonly already owned by the developer or acquired separately, and forms part of the equity.
Senior lenders focus on three things above all: the credibility of the development appraisal, the quality of the contractor and the professional team, and the developer's track record on comparable schemes. The monitoring surveyor, appointed by the lender to certify each drawdown, is how they keep that view current through the build.
Stretch-Senior and Mezzanine
When a scheme needs more leverage than senior debt will provide, the gap is filled either by stretch-senior debt or by mezzanine.
–Stretch-senior. A single lender provides a larger facility than a conventional senior loan. One agreement, one set of security, one credit process, at a higher blended cost.
–Mezzanine. A separate lender sits behind the senior, secured by a second charge or a share pledge. It can reach a similar total leverage, but it brings an intercreditor agreement, two credit processes and two sets of consents.
The choice depends on the programme, the appetite for intercreditor complexity and the terms available when the scheme is structured. A slower process can cost more than a higher margin.
Equity: The Layer Everything Rests On
No stack works without the right equity. Developers increasingly use preferred equity or a joint venture rather than deploying all of their own capital. A well-chosen equity partner reduces the developer's exposure, aligns incentives through a promote, and is read by senior lenders as a risk mitigant. Partners who understand development risk make better partners than those who approach it purely as yield.
Why the Senior Lender Reads the Whole Stack
Every layer behind the senior facility affects the senior lender's position. Subordinated debt with aggressive terms, equity that can leave early or a joint venture without clear control can each make a senior lender decline a scheme it would otherwise fund. The stack therefore has to be coherent before the senior debt is approached.
Our Role
We arrange the senior development facility, and our own mandates stay senior. Because the senior lender underwrites the whole stack, we review it with the developer before the market process: testing the appraisal, checking the layers behind the senior debt for terms a credit committee will question, and preparing the file accordingly. Each mandate then goes to a shortlist of three to five lenders, with fees agreed in writing up front and paid by the borrower on completion.
If you are planning a scheme and want to test the capital assumptions before committing to a site, we would encourage you to get in touch early.
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