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Real Estate Funding

Bridge, Mezzanine, Senior Debt, or Preferred Equity: How Developers Actually Choose

Most developers pick their financing the way they picked their first lender. Out of habit, and it shows up in the returns.

Ask a developer why they used bridging finance on their last acquisition and the honest answer is often “it’s what we used last time” rather than “it was the cheapest way to get there.” The same goes for mezzanine debt brought in reflexively to plug a funding gap, or equity given away when a debt instrument would have done the job for less. The capital stack gets built on familiarity, not fit. And in a market where margins are already thin, that habit is expensive.

This is not a technical problem. Every serious developer understands what bridge finance, mezzanine debt, senior debt and preferred equity are. The gap is in matching the instrument to the deal: the site, the timeline, the exit, and what the developer is actually willing to trade away to get the project funded.

1. What a capital stack actually is

A capital stack is simply the layered mix of finance used to fund a development, ranked by priority of repayment and level of risk. Senior debt sits at the bottom of the stack. It gets paid first and carries the lowest risk, which is why it is also the cheapest. Mezzanine debt sits above it, taking a second-loss position. Preferred equity sits above the debt layers but below common equity, and common equity, the developer’s own capital and that of any equity partners, sits at the top, carrying the most risk and the most reward (JPMorgan Chase, What is a Capital Stack in Real Estate?; Wall Street Prep, Capital Stack: Real Estate Investment Structure).

The order matters because it determines who gets paid when, and in what sequence, if a project underperforms. It also determines cost. The safer a lender’s position, the less they charge for the money. The higher up the stack an investor sits, the more they want in return for taking on that extra risk. Getting the mix right is not about finding the cheapest single instrument. It is about finding the combination that funds the whole project at the lowest overall cost, without giving away more control than the deal requires.

2. Bridge finance: speed at a price

Bridging is short-term senior debt, typically used for land acquisition, planning gain, or time-sensitive purchases where a developer needs to move before a full development facility can be arranged. It is fast: completion in weeks rather than months is standard, which is exactly why developers reach for it under pressure.

That speed carries a cost. Mainstream bridging deals in the UK currently price between roughly 0.65% and 0.95% per month, with rates for higher-risk deals stretching from around 0.55% up to 1.5% per month depending on loan-to-value, property type and exit strategy, plus arrangement fees typically in the 1% to 2% range (Fox Davidson, Bridging Loan Rates UK 2026; Construction Capital, Current UK Development Finance Rates 2026). Annualised, that is considerably more expensive than a development facility. Bridging earns its cost when it removes a genuine time constraint, securing a site before a competing buyer, meeting an auction deadline, or bridging the gap while planning consent comes through. It becomes an expensive habit when it is used simply because the paperwork is familiar and the relationship is already in place.

3. Senior debt: the cheapest money, if you can get enough of it

Senior debt is the core of most development finance structures. It is secured directly against the project, typically funds up to 55% to 60% of loan-to-value on more conservative structures, and prices considerably lower than the layers above it. Ground-up residential schemes for experienced developers are currently pricing between roughly 6.5% and 9.5% per annum, helped by the Bank of England base rate sitting at 3.75% as of the last review in July 2026 (Construction Capital, Current UK Development Finance Rates 2026; MoneySavingExpert, Base rate held again).

The mechanics matter as much as the rate. Senior debt is drawn in stages against construction milestones or periodic surveyor inspections, not released as a single lump sum. Each drawdown request needs an updated cost-to-complete schedule showing what has been spent and what remains, checked by a monitoring surveyor against the undrawn facility. Interest is usually rolled up and charged only on funds actually drawn, which means timing drawdowns tightly against genuine spend is one of the few free efficiencies in a development budget (thefinancebrokers.co.uk, How Development Finance Works; Construction Capital, Drawdown Schedules Development Finance).

The limitation is leverage. Senior lenders will not fund the whole scheme. That leaves a gap, usually between 40% and 45% of total cost, that has to come from somewhere else in the stack.

4. Mezzanine finance: closing the gap without giving away the company

Mezzanine debt sits behind senior debt and tops up total leverage, sometimes to 75% to 80% of project cost or value. It is not secured directly against the property in the way a mortgage is, which is part of why it costs more: mezzanine development finance is currently pricing at roughly 12% to 18% per annum, with a small number of lenders offering sub-12% pricing on the strongest, best-secured deals (Construction Capital, Current UK Development Finance Rates 2026).

The appeal is straightforward: it fills the funding gap between senior debt and the developer’s own equity without diluting ownership. The trade-off is cost and, in some structures, an equity kicker or control rights that only bite if things go wrong. For a developer confident in the numbers and determined to keep 100% of the upside, mezzanine can be the right price to pay for that certainty. For a developer already running tight margins, stacking mezzanine on top of senior debt can push the blended cost of capital high enough to erode the return it was meant to protect.

5. Preferred equity: capital that doesn't want your boardroom seat

Preferred equity sits above the debt layers and below common equity. It is not debt, and it is not secured against the asset the way senior or mezzanine debt is. Instead, preferred equity investors take a priority return ahead of the developer’s own equity, in exchange for taking more risk than a lender would (Willow Private Finance, Preferred Equity vs Mezzanine Debt in 2025; UK Commercial Finance, Preferred Equity vs Mezzanine Debt in UK Property Finance).

The distinction developers care about is control. Preferred equity typically does not come with voting rights or a claim on ownership upside, which makes it well suited to developers who need to reduce their blended cost of capital or increase leverage without handing over decision-making. It usually costs less than mezzanine on a like-for-like basis because it can be structured with more flexible repayment terms, but it still sits ahead of the developer in the payment order, which means it is not free money either. It is a genuine third option, not simply “equity” or “debt” by another name, and it is often the layer developers know least well.

6. The four questions that actually decide the mix

Every one of these four instruments answers a different question. The right capital stack for a given deal comes down to how a developer answers all four, not just the one that is on their mind that week.

Speed versus cost. How much is a delay actually costing against how much a faster instrument costs to arrange? A missed site is a lost project. A month’s extra bridging interest on a scheme that was never time-critical is a margin given away for nothing.

Dilution versus control. Is the developer willing to give up a share of the upside to reduce risk and access more capital, or is keeping full ownership worth paying a higher rate for debt instead?

Drawdown structure. Does the project’s build programme match how and when the chosen instrument releases funds? A facility with a rigid milestone schedule that does not match the actual construction sequence creates cash flow gaps that end up costing more to plug than the headline rate suggested.

Exit and timeline. Is the funding matched to how and when the developer expects to repay it, through sale, refinance, or income? Short-term instruments used to fund long-hold strategies, or long-term facilities carried past the point they’re needed, both cost more than they should.

7. Why developers default to the wrong instrument

None of this is because developers do not understand the instruments. It is because the market has made habit the path of least resistance. Shawbrook’s May 2026 research into mid-sized property developers found that 55% feel caught between products built for small businesses and those built for large corporates, 48% find it difficult to source appropriate funding, and 36% say they simply cannot access the level of capital their project needs (Property Reporter, Half of mid-sized property developers locked out of suitable finance). When the market itself does not offer an obvious fit, falling back on the lender you already know becomes the easiest decision, even when it is not the right one.

The structural pressure on smaller developers compounds this. The Home Builders Federation has tracked a roughly 80% fall in the number of SME home builders over the past 25 to 30 years, from more than 12,000 in 1988 to a fraction of that today, citing access to finance as one of the two biggest barriers to growth alongside planning (Home Builders Federation, Remove barriers and SMEs could deliver 25k more homes a year). Fewer relationships, tighter margins, and more scrutiny from every lender make it harder to justify shopping the whole capital stack on every deal. So developers do not. They use what worked last time, and the cost of that habit gets absorbed quietly into a lower return rather than shown as a line item anyone questions.

8. How Unison Direct structures the stack

This is the specific problem Unison Direct’s Funding Advisory service is built to solve. Rather than defaulting to one instrument or one lender relationship, the team structures capital across Bridge, Mezzanine, Senior Debt and Preferred Equity for each project on its own terms, matched against lender expectations, project viability and deal timelines from origination through to financial close.

That means developers get a capital stack sized to the deal rather than to the last one they closed: the right split between debt and equity to protect ownership where it matters, a drawdown schedule that actually tracks the build programme, and a blended cost of capital that reflects the true risk profile of the project rather than the convenience of a single lender relationship. The Real Estate Investment Analyst service sits alongside this, building the financial models and investment packs that make the case to lenders and equity providers in the first place.

The result developers are looking for is not a cheaper single instrument. It is a lower blended cost of capital across the whole stack, and a dilution-to-control trade-off that was actually chosen, not defaulted into.

Frequently Asked Questions

Complex Outsourced Accounting for Healthcare, Regeneration & Affordable Housing

Mezzanine debt is a loan, secured on a subordinate basis behind senior debt, that has to be repaid with interest regardless of project performance. Preferred equity is an investment, not a loan, that takes a priority return over the developer’s own capital but does not carry the same fixed repayment obligation or direct security. Preferred equity generally leaves more control with the developer; mezzanine debt is generally cheaper on a pure rate basis but can include an equity kicker.

 Mainstream bridging deals are currently pricing between roughly 0.65% and 0.95% per month, with the full market range running from around 0.55% to 1.5% per month depending on loan-to-value, exit strategy and credit profile, plus arrangement fees of typically 1% to 2% (Fox Davidson, 2026).

Most senior development lenders now cap lending around 55% to 60% loan-to-value or loan-to-cost, leaving the remainder of the project to be funded through mezzanine debt, preferred equity, or the developer’s own capital.

Not in the way common equity does. Preferred equity investors typically do not take voting rights or a share of ownership upside; they take a priority return ahead of the developer’s equity. It reduces the developer’s share of profit above a set return threshold, but it does not usually hand over control of the project.

Largely relationship and speed. Sourcing and comparing Bridge, Mezzanine, Senior Debt and Preferred Equity properly takes time and market access that many developers, particularly mid-sized firms, do not have in-house. Shawbrook’s 2026 research found 48% of mid-sized developers struggle to source appropriate funding, which pushes many back toward whichever lender they already have a relationship with.

It depends on four things: how time-sensitive the deal is, how much control you are willing to trade for capital, whether the funding structure’s drawdown schedule matches your build programme, and how and when you expect to exit. A capital advisory partner who works across all four instruments, rather than one who specialises in and defaults to a single product, can model the blended cost of each combination against your specific project.

Building the right capital stack starts with knowing what each layer actually costs your project, in cash and in control.
Talk to an expert at Unison Direct about structuring Bridge, Mezzanine, Senior Debt or Preferred Equity for your next development.

Sources & References