Structuring development finance: senior debt, mezzanine and equity
How sponsors blend capital layers to optimise leverage, cost of funds and returns.
Few developments are funded with a single instrument. The art of structured finance lies in layering senior debt, mezzanine and equity so that each tranche is priced for the risk it carries.
Senior debt: the foundation
Senior lenders rank first in security and set the tone for the transaction. Their key tests are loan-to-value (LTV), loan-to-cost (LTC) and debt service coverage ratio (DSCR). A well-supported feasibility and a credible cost plan are non-negotiable.
Leverage is not a goal. The goal is the lowest blended cost of capital that still leaves covenant headroom.
Mezzanine and equity
Mezzanine fills the gap between senior debt and sponsor equity, at a higher coupon and with subordinated security. Used sparingly, it can lift equity IRR significantly without breaching senior covenants.
| Layer | Typical share | Indicative cost | Security |
|---|---|---|---|
| Senior debt | 55 – 65% | Base + 2.5 – 4% | First-ranking |
| Mezzanine | 10 – 20% | 10 – 14% | Second-ranking |
| Sponsor equity | 20 – 30% | Target IRR 15%+ | Residual |
Key takeaways
Model downside early, negotiate covenants before you need them, and run a competitive process. Our team can structure and place the full capital stack for your next development.
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