Mezzanine Finance vs Joint Venture Equity: How to Choose

Mezzanine finance is a loan that sits behind your senior development finance in the capital stack. Where senior debt might cover 60-65% of GDV, mezzanine stretches total borrowing to 80-90% of costs. It reduces the equity you need to inject from 35-40% to as little as 10-15%.

The critical feature of mezzanine is that it's debt, not equity. The mezzanine lender has no ownership stake in your project and no share of your profits. They charge a fixed interest rate (typically 12-18% per annum) and an arrangement fee (2-3%). Your profit is yours to keep.

The trade-off is that mezzanine comes with an intercreditor agreement — a legal document that governs the relationship between the senior lender and the mezzanine lender. The senior lender has priority on repayment; the mezzanine lender is repaid after the senior debt is cleared. This subordinated position is why mezzanine costs more than senior debt.

Joint venture equity is an investment, not a loan. A JV partner contributes capital (sometimes the full equity requirement) in exchange for a share of the project's profits. Typical splits range from 50/50 to 60/40 (investor/developer), depending on who is contributing what.

In a typical JV structure, the developer contributes the site (or site knowledge and planning), project management expertise, and day-to-day execution. The equity partner contributes the cash needed alongside senior debt. The developer does the work; the investor provides the capital.

JV equity is not on your balance sheet as debt. It's a partnership, and the equity provider shares both the upside and the downside. If the project generates less profit than expected, the equity partner's return decreases proportionally. If it generates more, they share in the upside.

On the surface, mezzanine looks more expensive: 12-18% per annum vs a profit share of 40-60%. But the real comparison depends on your project's profitability.

Take a £5M GDV scheme with £1.5M senior debt, requiring £500K additional capital. With mezzanine at 15% over 14 months, the cost is approximately £87,500. With JV equity providing £500K for a 50/50 profit share on a scheme generating £1M profit, the cost is £500,000. Mezzanine is dramatically cheaper on a profitable scheme.

However, if the scheme makes only £200K profit (cost overruns, market downturn), mezzanine still costs £87,500 — eating 44% of your profit. The JV partner's share would be £100K. When profits are thin, JV can be less painful because the pain is shared.

The rule of thumb: if you're confident in your scheme's profitability and want to maximise your return, use mezzanine. If you want to share risk and are willing to share reward, use JV equity.

Mezzanine lenders have no say in how you run your project. They don't attend your site meetings, approve your contractor appointments, or influence your sales strategy. They lend money and expect it back with interest. Your project, your decisions.

JV equity partners typically want involvement. The degree varies — some are entirely passive ("silent partners" who contribute capital and wait for returns), while others want board seats, approval rights over key decisions (contractor selection, sales pricing, design changes), and regular reporting.

Before entering a JV, negotiate the governance structure carefully. A well-drafted JV agreement specifies exactly what the developer can decide unilaterally and what requires partner approval. Getting this wrong creates friction that can delay your project and damage your relationship.