Mezzanine Finance in Chelsea

Mezzanine finance is a second charge loan that sits between your senior development finance and your own equity in the capital stack. It allows you to borrow more than your senior lender will provide on its own, taking total leverage up to 90% of project costs. The mezzanine lender takes a subordinated position behind the senior lender, meaning they are repaid after the senior lender in any enforcement scenario. For Chelsea developments, mezzanine finance is particularly valuable because the high absolute values involved mean that even a 10-15% equity contribution can represent a very substantial sum.

Mezzanine finance typically provides an additional 15-25% of total project costs on top of your senior debt facility. When combined with senior debt at 65-70% LTC, this can take your total borrowing to 85-90% of total project costs. The exact amount depends on the strength of your development appraisal, your track record, the GDV relative to costs, and the specific mezzanine lender's appetite. For Chelsea projects, the strong end values and reliable buyer demand often support higher combined leverage than developments in less established locations.

Mezzanine finance rates for Chelsea development projects typically range from 1.0% to 1.75% per month, reflecting the higher risk the mezzanine lender takes by accepting a subordinated position behind the senior lender. Some mezzanine providers also charge an arrangement fee of 1.5% to 2.5% and may include a profit participation element. When blended with your senior debt rate, the overall cost of your combined facility will be higher than senior debt alone, but the reduced equity requirement means your return on capital invested can be significantly higher.

An intercreditor agreement (ICA) is a legally binding document that governs the relationship between the senior lender and the mezzanine lender. It sets out the priority of each lender's claim, the circumstances under which the mezzanine lender can take enforcement action, and the conditions for standstill periods. The ICA is critical because many senior lenders have specific requirements about which mezzanine providers they will work alongside and what terms the intercreditor agreement must contain. We manage this process on your behalf, ensuring the senior and mezzanine lenders' requirements are compatible before you commit to either.

Mezzanine finance for first-time developers is more challenging to obtain than senior debt. Most mezzanine lenders prefer to work with developers who have completed at least two or three projects, as the higher leverage increases the risk for all parties. However, some mezzanine providers will consider first-time developers with strong professional teams, particularly for smaller or less complex Chelsea projects. In some cases, stretched senior finance (up to 80% LTC from a single lender) may be a more practical alternative for developers building their track record.

The key difference is structural. Mezzanine finance involves two separate lenders: a senior lender (first charge) and a mezzanine lender (second charge), each with their own facility agreement, governed by an intercreditor agreement. Stretched senior is a single facility from one lender that provides higher leverage than standard senior debt, typically up to 75-80% LTC. Stretched senior is simpler and faster to arrange because there is only one lender to deal with and no intercreditor agreement needed. However, it may not reach the same leverage levels as a senior-plus-mezzanine structure, which can achieve up to 90% LTC.

Mezzanine finance typically takes 2 to 4 weeks to arrange from formal application. However, the timeline is often determined by the senior lender's process rather than the mezzanine lender's, because the intercreditor agreement must be agreed by both parties. If you are arranging senior and mezzanine finance simultaneously, the overall process usually takes 3 to 5 weeks. If you are adding mezzanine to an existing senior facility, the mezzanine can usually be arranged within 2 to 3 weeks, subject to the senior lender's consent.

The mezzanine lender takes a second legal charge over the development site, sitting behind the senior lender's first charge. They may also take assignments of key project documents including the building contract, professional team appointments, and any pre-sale agreements. Some mezzanine lenders also take a debenture over the borrowing SPV company and personal guarantees from the developer. The intercreditor agreement defines the mezzanine lender's enforcement rights, which are typically subordinated to the senior lender's position.

Mezzanine finance interest is typically rolled up throughout the project term and repaid in full on exit, along with the senior debt. In most cases, the senior lender is repaid first from the sale or refinance proceeds, and the mezzanine lender is repaid from the remaining balance before the developer receives their profit. Some mezzanine facilities include a waterfall repayment structure where proceeds from individual unit sales are split between the senior and mezzanine lenders according to an agreed formula.

Yes, it is possible to add mezzanine finance to an existing senior development facility, provided the senior lender consents. Not all senior lenders will agree to a second charge being placed on the property, so this needs to be checked at the outset. If you anticipate needing mezzanine, it is generally better to arrange both facilities simultaneously, as this allows us to select a senior lender we know will be comfortable with the mezzanine provider and intercreditor terms. Retrofitting mezzanine can be more complex and time-consuming.