Mezzanine finance and the human side of residential development

In residential development, success frequently hinges on more than just spreadsheets. Particularly for smaller developers, it’s very much about people – the personal and professional relationships that transform abstract plans into completed projects.

At Davon, we specialise in mezzanine finance for SME residential developers, and our approach to doing business embodies this human element by fostering collaboration, trust and a shared vision for success.

Of course, our priority is our relationship with our clients, but the human element extends to how we work with first-tier lenders, advisers, lawyers and everyone involved in the projects we finance.

What is mezzanine finance?

Mezzanine finance is a hybrid form of funding sitting between traditional senior debt and equity financing.

It fills a gap for developers who may not have enough capital to secure all the bank funding they need but are unwilling to dilute ownership through full equity partnerships.

In other words, it’s a sensitive area that can be the difference between a project going ahead, getting across the line or ending in tears mid-build.

Why relationships matter

Because we’re in it together, we find the relationships we build with prospective clients to win their business grow even stronger once a project goes ahead. These relationships, rooted in trust, mutual respect and shared goals are crucial for success in our experience.

You can see an example of that in how a chance meeting in a French petrol station led to a long-term partnership across multiple projects with NK Homes.

Read the Case Study

More than a transaction

Dealing with large financial institutions can sometimes feel distant. In contrast, mezzanine lenders often work closely with SME developers, forming partnerships that go beyond the transactional loan.

The developer-lender relationship is built on collaboration and communication, both essential for the success of any project.

Mezzanine finance companies are typically more agile, open to taking calculated risks and – since they only have a second charge on the assets behind the primary lender – more invested in the outcome of the project.

All this makes the relationship with developers more personal and interactive.

Every year, we charter a boat and take a group of client developers on a cruise in the Solent. It’s our way of saying thank you, naturally, but it’s also a great way to get to know people away from the day-to-day pressures of their projects and to build connections.

All aboard

For the developer, this human connection offers mentorship, guidance and access to a network of industry professionals.

Mezzanine lenders, with their extensive experience, can provide valuable insights into the market, introduce new opportunities and even guide the project’s strategic direction.

Developers benefit from a lender who is just as interested in the success of the project as they are.

One example from Davon’s portfolio is our work with Ashley James on an £8.5m clifftop mansion in Devon where the developer has had to weather the storm of rising materials prices and a changing market.

Read the Case Study

Trust: the bedrock of collaboration

One of the key ingredients in the relationship between a mezzanine lender and an SME developer is trust.

Trust is not built overnight, but it is the foundation of any successful collaboration. The lender must trust that the developer can execute the project as envisioned, and the developer needs to trust that the lender will provide the necessary financial support and guidance when challenges arise.

In many cases, mezzanine financing deals involve more face-to-face meetings and personalised interactions than traditional bank loans.

This fosters an environment of open communication where both parties can voice concerns, share updates and adapt to the changing needs of the project. The flexibility of mezzanine finance allows for this adaptability, something that is often absent in more rigid, traditional financing structures.

Fostering long-term success

Residential development is fraught with uncertainties – fluctuating markets, unforeseen construction issues and changing regulations are just some of the curve balls that can throw a project off course.

In these moments, a strong relationship between the lender and developer can help steer the project back on track.

When both parties are invested in the project’s success, they are more willing to work together to find solutions.

This collaboration not only mitigates risks but also drives long-term success, leading to further partnerships in future developments.

A lender who sees the developer succeed is more likely to fund their next project, fostering a cycle of trust, growth, and shared success.

At Davon, we’ve had exactly that experience working with ex pro-footballer Lee Brown’s company, B3 Homes, to build a portfolio of projects.

Read the Case Study

Last word

Mezzanine finance in residential development is much more than a financial tool.

It’s a catalyst for forming meaningful, productive relationships between lenders and developers.

This collaborative approach fosters trust and enhances the likelihood of project success.

In the world of SME development, where personal connections often make all the difference, the human element of mezzanine finance is as important as the numbers themselves.