Blended Finance for Development: Combining Multiple Funding Sources

Blended finance refers to the practice of combining multiple funding sources into a single, coherent capital structure for a development project. Rather than relying on a single lender or a single type of finance, the developer assembles a bespoke funding package that draws on senior debt, mezzanine finance, equity from investors, and potentially grants or other concessionary capital. Each source contributes a different amount, at a different cost, and with different risk characteristics. The art of blended finance lies in combining these sources to achieve the lowest possible blended cost of capital while meeting the developer's leverage and cash-flow requirements.

The concept is straightforward but the execution is complex. Each funding source has its own legal documentation, its own security requirements, and its own conditions that must be satisfied before funds are released. The various capital providers must agree on their respective positions in the capital stack, their rights in the event of default, and the mechanics of how drawdowns and repayments flow between them. This coordination is typically managed through an intercreditor agreement that governs the relationship between senior and junior lenders.

We have structured blended finance packages for projects ranging from £1.5 million residential conversions with two funding sources to £30 million mixed-use developments with four or five separate capital providers. The common thread across all these deals is that the blended approach delivered better overall terms than any single funding source could have provided on its own. The blended cost of capital, combining cheaper senior debt with more expensive but necessary subordinated funding, produced a more efficient and affordable structure than maximising any single lending product.

The primary building blocks available to UK developers are senior debt, mezzanine debt, equity (from the developer or external investors), and in certain cases grants or other forms of concessionary finance. Each block has a different cost, a different leverage contribution, and a different level of control over the project. Understanding the characteristics of each allows you to construct a structure that is optimised for your specific objectives.

Senior debt, provided by banks and specialist development lenders, typically covers 55-70% of project costs at rates of 6.5-10%. This is the cheapest layer of the capital stack and should form the foundation of any blended structure. Mezzanine finance covers an additional 10-20% of costs at rates of 12-18%, reducing the equity requirement but at a higher price. Developer equity, whether in the form of cash, land value, or retained profits, typically accounts for 10-25% of costs and carries the highest risk but also the highest potential return. External equity from JV partners splits the profit but contributes capital that the developer does not have.

Beyond these core sources, developers should explore whether grant funding is available for their scheme. Homes England, local authorities, and the Greater London Authority all provide grants for affordable housing, brownfield remediation, and infrastructure. Grants range from £20,000 to £100,000 or more per affordable unit and do not need to be repaid, making them the cheapest form of capital available. On a 20-unit scheme with 8 affordable units attracting £40,000 of grant per unit, the total grant funding of £320,000 directly reduces the developer's equity requirement or improves the project margin. We have structured deals where grant funding transformed a marginal scheme into a highly profitable one.

The blended cost of capital is the weighted average cost of all the funding sources in your capital stack, expressed as a percentage of total project funding. It is calculated by multiplying the cost of each source by its proportion of total funding, then summing the results. This single number tells you the overall price you are paying for the complete funding package and allows you to compare different structuring options on a like-for-like basis.

Consider a £3 million total project cost funded as follows: £2 million senior debt at 8% (67% of costs), £500,000 mezzanine at 15% (17% of costs), and £500,000 developer equity at an assumed opportunity cost of 0% (17% of costs, since it is your own money). The blended cost is: (67% x 8%) + (17% x 15%) + (17% x 0%) = 5.36% + 2.55% + 0% = 7.91%. If you replace the mezzanine with an equity JV partner who takes 40% of profit on a projected £600,000 profit, the equity cost is £240,000, which on a £500,000 contribution equates to 48%. The blended cost in this scenario is dramatically higher: (67% x 8%) + (17% x 48%) + (17% x 0%) = 5.36% + 8.16% + 0% = 13.52%. The JV route costs almost double the blended rate of the mezzanine route, illustrating why equity JV is not always the cheapest option despite eliminating debt servicing.

We model these blended cost calculations for every deal and present developers with clear comparisons between different structuring options. The optimal structure is not always obvious. In the example above, the mezzanine route is cheaper but requires the developer to meet monthly covenant requirements and accept a second charge on the property. The equity JV route is more expensive but may offer greater flexibility and no debt service obligation. The right answer depends on the developer's risk tolerance, cash position, and strategic priorities. Submit your project through our deal room and we will model multiple structuring scenarios so you can make an informed decision.

When two or more lenders are involved in a blended finance structure, an intercreditor agreement (ICA) is required to govern the relationship between them. The ICA establishes the priority of repayment, the rights of each lender to enforce their security, restrictions on each lender's ability to amend their facility terms, and the mechanics of standstill periods during which the junior lender agrees not to enforce while the senior lender pursues its own remedies.

The ICA is one of the most negotiated documents in a blended finance deal, and the terms can significantly impact the developer's position. Key provisions to watch include: the standstill period (how long the mezzanine lender must wait before enforcing after a default, typically 90-180 days), cure rights (whether the mezzanine lender can cure a default under the senior facility to protect its position), and consent rights (whether the senior lender must consent to amendments to the mezzanine facility and vice versa). Each of these provisions can create friction during the project and constrain the developer's flexibility.

In our experience, the biggest practical challenge is timing. Negotiating an ICA between two institutional lenders can add four to six weeks to the deal timeline. Each lender's legal team has its own standard-form ICA, and reconciling the two can be time-consuming and expensive. Legal costs for the ICA alone can run from £10,000 to £25,000, in addition to the standard legal costs for each facility. We mitigate this by working with senior and mezzanine lenders who have existing ICA templates agreed between them, which can reduce negotiation time to one to two weeks. This is one of the advantages of working with a broker who understands which lender combinations work smoothly together.

To illustrate how blended finance works in practice, consider a real-world example from our portfolio. A developer was delivering a mixed-use scheme in the West Midlands comprising 24 apartments and 3 commercial units, with a GDV of £8.5 million and total development costs of £6.8 million. The developer owned the site (valued at £1.2 million) and had £400,000 of available cash. The funding gap was therefore £5.2 million.

We structured the funding as follows. Senior debt of £4.5 million (66% of costs) was provided by a specialist development lender at 7.75% with a 1.5% arrangement fee. Mezzanine finance of £700,000 (10% of costs) was sourced from a dedicated mezzanine fund at 14% with a 2% arrangement fee. The developer contributed £1.2 million of land equity plus £400,000 cash (24% of costs combined). A Homes England grant of £200,000 was secured for the four affordable units within the scheme, reducing the developer's effective equity requirement.

The blended cost of capital, excluding the developer's own equity and the grant, was approximately 8.9% on the debt portion. Total finance costs over the 18-month build period were projected at £430,000, leaving a projected developer profit of £1,270,000 (15% on GDV). Without the mezzanine, the developer would have needed an additional £700,000 of cash or would have needed to bring in an equity JV partner. An equity partner providing £700,000 for a 35% profit share would have cost £595,000, almost £200,000 more than the mezzanine route. This example demonstrates the power of blended finance to optimise developer returns when structured correctly.

Blended finance is most appropriate for medium to large schemes where the equity gap is significant and the developer's own resources are insufficient to bridge it. Projects with a total cost above £2 million and an equity gap above £300,000 are typically the threshold at which the additional complexity and cost of a blended structure becomes worthwhile. Below this level, the legal and arrangement fees associated with multiple funding sources can consume a disproportionate share of the project margin.

It is also appropriate when the developer wants to maximise the number of projects they can pursue simultaneously. By reducing the equity requirement per project through mezzanine or JV contributions, the developer can spread their available capital across more deals, increasing portfolio-level returns even if the per-project margin is slightly lower. We discuss this portfolio approach in detail in our guide on portfolio development finance.

Blended finance is less appropriate for simple, small-scale projects where a single lender can provide all the required funding. A four-unit residential scheme costing £1.2 million, where the developer has £400,000 of equity, needs only an £800,000 senior facility. Introducing mezzanine or equity partners into this structure would add complexity and cost without meaningful benefit. Similarly, developers with significant cash reserves may find that a simple senior-debt-plus-cash-equity structure delivers the best risk-adjusted return, avoiding the fees and coordination challenges of a multi-source approach. The key is matching the complexity of the capital structure to the scale and requirements of the project, which is precisely the structuring advice we provide through our development finance advisory service.