Senior debt in commercial development: what it funds and what equity must cover

What senior debt funds in a commercial development

Senior debt is the first-charge loan that a lender advances to fund the largest and cheapest share of a commercial development scheme. It sits at the base of the capital stack, ranks ahead of every other funder, and is repaid first when the finished asset is sold or refinanced.

On a commercial scheme, senior debt funds the site purchase and the build, released in stages against a monitoring surveyor's certificates. It is sized against two caps, and the facility is the lower of the two figures:

Because it holds the first charge and is repaid before anyone else, senior debt carries the lowest interest rate in the development finance structure. Everything a developer borrows or raises above it costs more, precisely because it ranks behind the senior lender. For most commercial developers, senior debt is the anchor of the funding plan and the first piece of finance to secure.

How commercial senior debt differs from residential

The mechanics of a first-charge loan are the same, but a commercial senior lender underwrites a different exit. On a residential scheme the exit is unit sales; on a commercial scheme it is an investment value driven by rent and yield.

That difference shapes the leverage on offer. A commercial senior lender leans on the strength of the tenant covenant and the certainty of the letting. A pre-let to a strong covenant contracts the income, de-risks the exit, and lifts leverage toward the top of the range. A speculative office or leisure scheme with letting risk draws less senior debt and a larger equity requirement.

Where the completed asset is held rather than sold, the senior lender also tests the investment exit: whether the stabilised rent covers the debt on a term refinance, measured by the debt service coverage ratio. A commercial appraisal that only works on a sale, and not on a hold, is a weaker proposition to a first-charge lender.

What the first charge lender will not fund: the equity gap

Senior debt deliberately stops short of the full cost of a scheme. The gap between the senior loan and total project cost is the equity, and it is the developer's to fill.

On a commercial scheme that equity layer typically has to cover:

• The land deposit: the share of the site price the senior loan does not advance
• Professional and finance fees not fully rolled into the facility
• The contingency the lender insists sits behind the build
• Any cost overrun once the contingency is used, which falls on equity first

This is the layer that decides whether a fundable scheme actually gets built. A developer can hold a strong appraisal and a willing senior lender and still stall, because the equity above the first charge is not in place.

Where the equity above senior debt comes from

The equity that sits above the senior loan is not a single thing. It is a set of layers, each ranking behind the first charge and ahead of the developer's own profit, and each priced for the risk it carries.

Developer cash is the simplest but the scarcest, and tying it up in one scheme is capital that cannot fund the next. Preferred equity takes a fixed return before the developer sees profit. Mezzanine finance sits as a second charge behind the senior lender and lifts combined leverage. A joint venture partner funds the gap in return for a share of the upside rather than a rate.

For a developer with a strong scheme but limited cash, a capital partner is often what turns a funded senior facility into a built scheme. Specialist providers arrange the equity layers above senior debt, from preferred equity through to full joint venture, so the developer contributes experience and the scheme rather than the whole of the cash. That capital ranks behind the first charge and is paid out of profit or a preferred return, which is why it costs more than the senior loan beneath it.

Intercreditor basics: how mezzanine ranks behind senior debt

The moment a second lender sits above the senior debt, the two lenders need to agree who gets paid first if the scheme runs into trouble. That agreement is the intercreditor deed, and it governs the relationship between the first-charge senior lender and the second-charge mezzanine funder.

• Priority: the senior lender is repaid in full before the mezzanine funder receives principal
• Standstill: the mezzanine funder agrees not to enforce its charge while the senior loan is live
• Cure rights: the mezzanine funder may step in and cure a default to protect its position
• Control: the senior lender leads on enforcement, with the mezzanine funder ranking behind

For the developer, the intercreditor deed is why stacking mezzanine on top of senior debt takes longer to arrange than a single facility: two lenders have to agree terms with each other, not just with the borrower. It is also why a stretch senior facility, where one lender provides the higher leverage under a single charge, can be simpler than a separate senior and mezzanine structure, even where the blended cost is similar.

Where the top-up sits as a distinct tranche, our mezzanine finance desk arranges the second-charge layer and the intercreditor terms alongside the senior lender, so the two facilities complete together rather than in sequence.

How sector shapes senior debt leverage

Commercial is not one market, and the senior debt on offer moves with the certainty of the exit for each asset class. Our sector desk figures show how far the first-charge loan reaches by use:

The pattern is consistent: sectors with deep institutional demand and a contracted exit, logistics, industrial and pre-let PBSA, support senior debt toward the top of the range. Income-led sectors that live or die by the covenant, retail, leisure and hotels, draw a lower first charge and leave a deeper equity gap above it. A pre-let or an operator agreement is the single change that most improves the senior leverage on offer.

Senior debt finance and the other development finance around it

Senior debt finance is one product in a wider development finance toolkit, and a commercial developer usually draws on several across a single property development project. Each form of finance funds a different stage of the scheme, and the senior loan is simply the largest and cheapest development loan of them all.

Bridging finance carries a property development project to the point where a development loan can take over. Senior debt finance and stretched senior fund the build. Mezzanine finance and equity fill the gap above them. Most commercial development finance projects use three or four of these loans in sequence, and the interest on each reflects how it ranks against the first charge: the senior loan is cheapest, and every layer of funding above it costs more.

Commercial development finance arranged for companies and experienced developers is unregulated lending that sits outside the Financial Conduct Authority's regulated mortgage perimeter. We are a finance arranger and introducer, not a lender, and the development finance lenders and equity funders we work with price each loan in the structure independently.

For developers weighing the options, the practical question is how much senior development finance the deal supports before the pricier funding above it is needed. Bridging loans, senior loans, stretched senior and mezzanine loans are all forms of short-term property financing, and the right mix of funding depends on the project, the sector and how much of its own capital the developer wants to commit across its projects.

Worked example: senior debt and the equity above it

Take a commercial property development scheme with a 4,000,000 pound gross development value and 2,800,000 pounds of total cost. See how the senior debt sizes, and what the equity above it has to cover:

The loan-to-cost cap bites first, so the first-charge facility is 1.82m and the equity layer above it is 980,000 pounds. A developer with, say, 400,000 pounds of its own cash still has a 580,000 pound gap to close, through mezzanine, preferred equity or a joint venture partner. That is the layer where most schemes are won or lost, long after the senior lender has said yes.

How we structure the layers above senior debt

We arrange commercial development finance for developers across the whole capital stack, from the senior debt at the base to the equity at the top. We start from the senior loan a property development scheme can carry, then model the cheapest way to fill the equity above it: how much stretched senior a single lender will offer, where mezzanine finance beats preferred equity, and when a joint venture partner funding the gap for a profit share leaves the developer better off than borrowing every pound. Running the scheme across the whole panel of development finance lenders, rather than one desk, is how a developer secures the keenest senior loan and the cheapest funding above it.

You can size an indicative first-charge facility with our development finance calculator, or send us the scheme and appraisal and we will come back with a view on the senior debt, the equity gap above it and the likely all-in terms within one working day.

Data sources: indicative loan-to-cost, loan-to-GDV and sector leverage figures from Commercial Property Development Finance desk figures (2026), as published across our finance and sector guides. Illustrative and not an offer of finance.