Senior development lenders typically fund a proportion of costs and expect the developer to contribute the remainder as equity. On a scheme of any size that contribution runs to a substantial sum, and it is the point at which a great many viable projects stall.
The site works. The appraisal works. The developer simply does not have that much cash sitting available, or has it committed to a scheme already underway. This article covers the realistic ways that gap gets closed and what each one costs in practice.
Understanding the Gap
A conventional senior facility for a residential development might cover somewhere in the region of sixty-five to seventy-five per cent of total costs. The developer funds the balance, usually front-loaded, because the land generally has to be acquired before the lender will release construction funds.
That timing is what makes the equity requirement bite. It is not spread across the build — it is needed at the outset, when nothing has yet been built and no value has yet been created.
Where a developer can cover it, senior debt alone is the cheapest structure and there is nothing further to consider. Where they cannot, three routes are commonly used, and they are genuinely different from one another.
Route One: Joint Venture Funding
In a joint venture, an equity partner provides some or all of the cash contribution in exchange for a share of the profit rather than a fixed interest rate.
This is the only route that meaningfully reduces the developer’s cash requirement, and in some structures removes it almost entirely. The partner is taking development risk alongside you, and the return they seek reflects that — commonly a substantial share of the profit, and often with a preferred return paid before profits are split.
The trade-off is control and economics. You are giving away a share of the upside, and your partner will expect meaningful input into decisions, cost control and sales strategy. Structures vary considerably: some partners are passive providers of capital, others are actively involved.
Joint venture partners assess the developer as closely as the scheme. Track record matters enormously here — more than in senior lending, where the security is the primary consideration. A first scheme is harder to place on a joint venture basis than a fifth, though not impossible where the site itself is exceptional or the developer brings relevant construction experience. Our first-time developer finance page covers what lenders and partners look for from developers without a completed scheme behind them.
Route Two: Mezzanine Debt
Mezzanine finance sits behind the senior facility and fills part of the equity gap as debt rather than equity. It is more expensive than senior debt, reflecting its subordinate position, but considerably cheaper than giving away a share of profit if the scheme performs well.
The critical difference from a joint venture is that mezzanine is repayable regardless of outcome. If the scheme underperforms, the mezzanine lender is still owed their principal and interest, and they rank ahead of you. On a scheme that goes to plan this is the better deal; on one that does not, the risk sits with you rather than being shared.
Mezzanine typically reduces the developer’s cash requirement rather than eliminating it — most providers still expect meaningful skin in the game. Our mezzanine development finance page covers typical terms.
Route Three: Stretched Senior
Stretched senior is a single facility from one lender at a higher loan-to-cost than conventional senior debt, priced between senior and mezzanine.
Its main advantage is simplicity. One lender, one set of legal documents, one intercreditor position to negotiate — which is to say, none. Where a scheme is straightforward and the numbers support it, this is frequently the most efficient answer, and it avoids the delay and cost of arranging two facilities that then have to agree terms with each other.
Fewer lenders offer it, and appetite varies with the market and the asset type. Our stretched senior loan finance page sets out how these facilities are structured.
Choosing Between Them
The decision usually comes down to three questions.
How confident are you in the appraisal? Where margins are comfortable and the sales evidence is strong, debt structures preserve more of your upside. Where the scheme is finely balanced, sharing risk with an equity partner may be worth the profit share.
How much cash can you genuinely commit? Mezzanine and stretched senior both assume a developer contribution. If yours is close to zero, joint venture may be the only realistic route.
What is your track record? Debt providers look primarily at the asset and the appraisal. Equity partners look hard at you. A developer with completed schemes has options a first-timer does not.
It is worth noting that these structures are not mutually exclusive, and larger schemes sometimes combine senior debt, mezzanine and equity in a single capital stack.
Don’t Neglect the Exit
Whichever route funds the build, the facility has a term, and development schemes routinely overrun. Where units remain unsold at the end of the term, refinancing onto a cheaper facility while sales complete avoids default interest on a development loan — usually the single most expensive money in the structure. Our development exit finance page explains how that works.
Planning for this at the outset rather than in the final month of the term produces materially better terms.
Frequently Asked Questions
What return does a joint venture partner typically expect?
It varies widely with scheme risk, size and the developer’s track record, and is negotiated case by case rather than following a standard formula. Expect a preferred return paid ahead of profit share in most structures.
Can I fund a scheme with no cash at all?
Rarely through debt alone. Some joint venture structures come close, but partners generally expect the developer to contribute either capital, the site itself, or clear value through planning gain already achieved.
Does mezzanine finance require the senior lender’s consent?
Yes. The two lenders enter an intercreditor agreement setting out ranking and rights, and the senior lender must agree to the arrangement. This is routine but adds time, which is worth building into your timetable.
Is stretched senior always cheaper than senior plus mezzanine?
Not automatically — it depends on pricing at the time and the specifics of the scheme. It is usually faster and simpler, which has its own value where a land purchase deadline is approaching.
If you have a site and an appraisal that works but the equity requirement is the obstacle, the structure is usually solvable. You can see the full range of development facilities we arrange on our homepage and across our development finance pillar, or contact our team to discuss the scheme.