Investment approach
Financing a Building Purchase from 10 M€: Debt, Equity, Mezzanine
Debt lifts returns on capital only while the project earns more than the loan costs. In the example, 55% debt gives 11.3% against 8.4% without it, but the worst-case loss is almost five times larger.
Financing the purchase of a 10 M€ building with debt raises the return on capital only while the project earns more than the loan costs. In the worked example the project makes 8.4% a year without debt, and 11.3% with a loan for 55% of costs at 5.75%. If the exit price comes in 4 M€ lower, the loss with debt is almost five times larger. Mezzanine at 12% lowers the return in this example. The rules were checked as of 12 October 2026.
What the rate is made of
The rate on a building loan consists of a base and the bank's spread. The base is high at present: the 12-month Euribor in September 2026 was 3.247% (Banco de España, published 1 October 2026). On 10 September 2026 the ECB raised its three key rates by 25 bp, and the deposit rate became 2.50% from 16 September (ECB).
The bank sets the spread project by project, and it has no general value. The calculation below assumes 2.5 pp, for a total of 5.75%: this is an assumption, not a market offer. How the base moves a project is covered in the article on Euribor and a fixed rate.
Three structures on one project
Worked example, not a forecast. The building is bought for 10 M€, ITP (property transfer tax) at 20% comes to 2 M€, costs before works are 360,000 €, works 6 M€ over 18 months. Total costs 18.36 M€. Exit in month 30, revenue after costs 22 M€. Interest accrues and is repaid at exit; corporate income tax is not taken into account. The return on capital is annual and calculated on monthly flows.
| Structure | Equity, €M | Debt at exit, €M | Return on equity at exit of 22 / 20 / 18 €M | Break-even exit, €M |
|---|---|---|---|---|
| No debt | 18.36 | 0 | 8.4% / 3.9% / −0.9% | 18.36 |
| Senior debt 55% at 5.75% | 8.26 | 11.49 | 11.3% / 1.3% / −10.1% | 19.75 |
| Senior 45% at 5.75% and mezzanine 15% at 12% | 7.34 | 9.40 and 3.60 | 9.4% / −2.1% / −15.9% | 20.35 |
Borrowing adds 2.9 pp at the planned exit, and at the worst exit it gives a result 9 pp worse than the project without debt. The loan-to-value ratio (LTV) at exit in the table is 52% at an exit of 22 M€, 57% at 20 M€ and 64% at 18 M€. Mezzanine costs more than the project itself earns: 12% against 8.4% without debt. When an asset earns less than the cost of money, every euro of debt added reduces the return on capital. A rate of 7% instead of 5.75% lowers the result of the second row from 11.3% to 9.8%.
What mezzanine is in Spanish documents
Mezzanine is subordinated debt between the senior loan and equity, and it costs more than senior debt. In Spain it is often set up as a préstamo participativo (profit-participating loan): the lender receives interest that depends on the company's results, ranks after ordinary creditors, and for the purposes of capital reduction and liquidation the loan counts as equity (art. 20 RDL 7/1996).
A loan from the investor personally needs separate checking. In insolvency, loans from persons specially related to the debtor and loans subordinated by contract are treated as subordinated (art. 281 TRLC, the Insolvency Act). The circle of related persons is defined by law, so the structure of an investor's loan is checked by an abogado (lawyer) before signing. An overview of the capital layers is in the article on the project capital structure.
Taxes and fees that hit debt
AJD (stamp duty on legal documents) on a mortgage is paid by the bank: for loans with a mortgage the taxpayer is the prestamista (lender) (art. 29 TRLITPAJD). The base includes the amount of the obligation together with the interest and penalties the mortgage covers (art. 30.1), and the rate in Catalonia is 2% (ATC). If the mortgage is for 12.5 M€, the tax is about 250,000 €. The bank builds it into the price of the loan.
Loan interest is deductible from corporate income tax within 30% of operating profit, but in any case up to 1 M€ of net financial expenses a year (art. 16 LIS). In the example interest over 2.5 years is 1.39 M€, that is about €560,000 a year, so it does not reach the limit. It can be deducted only if there is taxable profit. The calculation is done by an asesor fiscal (tax adviser).
When debt does not suit
It does not suit you if the project cannot withstand an exit price about 10% below the estimate: at 20 M€ in the example the return with debt falls to 1.3% and the LTV rises to 57%. It does not suit you if the exit depends on one outside decision, for example the Generalitat's answer on tanteo (right of first refusal) (article on selling): each month of delay adds about 55,000 € of interest to the debt. And it does not suit anyone who needs a fixed payment: interest accrues and is repaid in one go.
The DNPI Capital model: DNPI's fee is 50% of the project's profit, and the other half stays with the investor. If the investor's return over the whole project, after distribution, is below the contractual 10%, DNPI pays compensation out of its own fee. This is a return per project, not per year; the terms, calculation base and limits are set by the contract for the specific project; it does not guarantee the preservation of capital. How debt affects the distribution is also determined by the contract. DNPI has no completed projects involving whole buildings, so what is described here is a method, not a result.
Next step: put your own rate and debt share into the investor calculator. For developers' bridge loans there is an article on financiación puente.
Questions and answers
What share of a building purchase does a bank finance?
The bank decides for each project. The share of 55% of costs in this article is an assumption for the calculation, not a bank offer.
What is mezzanine in plain words?
Subordinated debt between the bank's loan and the investor's equity. It costs more than the bank loan and is repaid later. In Spain it is often set up as a préstamo participativo.
How does a rise in Euribor affect a project?
Each point added to the rate eats part of the return on capital. In the example, going from 5.75% to 7% lowers the result from 11.3% to 9.8%.
Who pays AJD on a mortgage in Catalonia?
The bank, as the prestamista (art. 29 TRLITPAJD). The rate is 2% according to the ATC, and the bank usually builds it into the loan terms.
