Mezzanine finance for care and supported living schemes

How does the capital stack work on a care scheme?

The capital stack is the order in which money goes into a project and the order in which it is repaid. At the bottom sits the senior development finance facility, typically up to around 65 to 70 percent of total cost, secured by first charge and repaid first. Above it sits the mezzanine loan, secured by second charge, repaid once the senior lender is clear. At the top sits the developer's own equity, the first money in and the last money out. Each layer carries more risk than the one below it, and each prices accordingly.

On a care or supported living scheme the stack is shaped by the exit. For supported living the exit is usually a provider lease completing and a refinance or forward sale on the lease-based value; for a care home it is a term refinance once the home is registered and occupancy has built to support the going-concern value. The mezzanine lender therefore underwrites that exit as carefully as the build cost, because its repayment depends on the completed scheme supporting a refinance or sale large enough to clear both layers of debt before the equity takes its profit. We model that exit before any mezzanine terms are agreed.

How much can a mezzanine loan add to your funding?

A mezzanine facility on a care or supported living scheme typically runs from 250,000 pounds to 10 million pounds or more, sized as the slice between the senior advance and around 85 to 90 percent of total project cost. So on a scheme where the senior lender funds 65 percent of cost, the mezzanine lender might add a further 20 to 25 percent, leaving the developer to fund the balance in equity. The exact ceiling moves with the scheme, the location, the strength of the pre-let or demand evidence and the developer's track record.

The stack is also tested against value, not just cost. A mezzanine lender will look at the combined senior and junior debt against the projected value of the finished scheme, whether the lease-based value of a supported living development or the going-concern value of a trading home, and want headroom there too, because that value is what the eventual refinance is raised against. A scheme pre-let to a strong registered provider supports a fuller stack than a speculative one. We size the junior layer so the senior debt, the mezzanine and the equity still work together if the scheme runs slower than planned.

What rates and fees apply to mezzanine debt?

Mezzanine debt prices well above senior debt because it stands second in line. Rates typically start from around 12 percent a year and move with leverage, scheme risk and sponsor strength. To protect cash flow during the build and any lease-up, the interest is often partly or wholly rolled into the loan and settled at exit rather than paid monthly. Arrangement fees of 1 to 2 percent are common, and some mezzanine lenders add an exit fee or, on larger deals, a small profit participation.

The right way to judge that cost is blended across the whole stack and against the alternative of raising extra equity, not in isolation. A mezzanine loan at around 12 to 14 percent on a 20 percent slice of the funding, sitting above senior development finance at a far lower rate, produces a blended cost of capital that is usually well below the return an equity partner would expect for the same money. That is the trade at the heart of every mezzanine decision, and we run those numbers for you on each structure before you commit.

What does a junior lender want to see?

A mezzanine lender underwrites everything the senior lender does, then looks harder. Expect scrutiny of the total cost build-up, the contingency, planning consent, the professional team and your track record delivering schemes, plus the sector specifics: for a care home the catchment, the local-authority and private-pay fee picture, competing supply and the operating model; for supported living the pre-let or forward-funding agreement and the registered provider's covenant and regulatory standing. Because the mezzanine position only works if the exit arrives broadly on plan, a credible operator or provider story carries real weight.

The other half of the underwrite is the intercreditor agreement, the contract that governs how the senior and mezzanine lenders behave alongside each other. It sets out the second charge, what happens on default, whether the mezzanine lender can cure a senior breach and how cash is distributed. Senior lenders must consent to the junior layer, and not all of them welcome one. We know which senior funders work comfortably with mezzanine behind them, and we negotiate the intercreditor terms so the two layers do not fight each other mid-build.

Should you take junior debt or raise more equity?

The honest comparison is between mezzanine debt and giving away a share of the project. Equity from a partner does not have to be repaid on a date and shares the downside, but it permanently dilutes your profit, often by a large margin on a successful care scheme where much of the value is created once the home is trading at mature occupancy or the provider lease completes. Mezzanine costs more than senior debt but it is finite: once it is repaid at the refinance, every pound of subsequent value belongs to you.

The discipline runs the other way too. Mezzanine is still debt, with interest accruing and a repayment date, and a scheme that takes longer to let or register can find the rolled interest eating into the developer's profit. The sensible test is whether the projected returns comfortably absorb the mezzanine coupon under a slow case as well as the base case. Where they do, junior debt usually beats dilution. Where they do not, an equity or joint venture structure is the safer answer, and we arrange those too.