Mezzanine Finance
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Author: Gary Hemming CeMAP CeFA CeFA CSP
20+ years experience in development finance
Mezzanine finance explained
What is mezzanine finance?
Mezzanine development finance is designed to act as a top-up loan, to bridge the gap between the developer’s available deposit and the loan available from the senior lender.
Mezzanine funders will usually secure their position by taking a second charge over the development to reduce their risk of financial loss.
When would you take out this type of finance?
This financing option is generally used to reduce the deposit needed to undertake a property development project. Funding can be used to reduce deposits, to fund a gap in deposit, or to allow you to retain funds for future deals.
By supplementing their borrowing with mezzanine finance, property developers can secure the highest return on investment, with the lowest deposit contribution.
Mezzanine finance criteria
Criteria at a glance
Below are the main criteria points to consider when taking out mezzanine finance.
– Borrow up to 90% loan to cost
– Terms from 6-24 months
– No maximum loan size
– Experienced developers preferred
– Planning permission in place or permitted development rights available
– Loans can include part of the land purchase costs
What locations are eligible for funding?
We can offer funding for schemes across England, Wales and Scotland. We have funders who can offer special, low rate lending for projects in London and the South East.
How much can I borrow and what will it cost?
Loan size & LTC
We can offer mezzanine funding from £250,000 with no maximum loan size. We can usually fund up to 90% of the total project costs using mezzanine finance.
How much will it cost?
Mezzanine finance tends to be priced on a case by case basis. We work with lenders across the whole market to ensure we always secure the best terms for your project.
Rates usually start at 10% per annum, with rates as high as 30% on offer for the riskiest projects. As the provider is sitting behind the main development finance lender, they are taking a much higher risk and will charge a premium as a result.
How is pricing decided?
Pricing will usually depend on the following factors:
- Amount of deposit input
- Likely demand for the finished product
- The project that you’re building
- The strength and experience of the borrower
- The location of the project
- The amount of funds required
Where to get mezzanine finance
Lenders
As this is a very specialist area of finance, the lenders who operate in the market tend to be specialist funders who offer only this type of finance.
With mezzanine finance being a risky form of lending due to the high gearing involved, high street lenders don’t offer it.
Using a broker
A broker will help you access the market quickly and steer your project to a lender who is likely to offer finance. This is, of course, dependent on the experience of the broker. Experience is key to success in this market and choosing to work with an inexperienced broker could be costly.
The price paid for this support comes in the form of broker fees. You’ll usually pay a fee in the region of 1% of the amount raised. This is usually payable when the loan application completes.
The alternatives to mezzanine finance
Senior development finance
Senior development finance can be an alternative to mezzanine finance, but more commonly works alongside it. This type of finance is offered at a lower rate, with a lower loan to gross development value (LTGDV) and loan to cost (LTC).
The difference between maximum loan offered by each lender can be significant, so its worthwhile checking if you can get more from a senior funder before considering mezzanine finance.
Stretch senior development finance
Stretch senior funding is designed for those who want to borrow more than would typically available from traditional senior debt. Stretched senior finance allows you to keep all of your borrowing with one lender and may prove simpler than running mezzanine finance alongside senior debt.
A comparison of both options is usually wise before committing to a funder (or funders).
Joint venture development finance
This option goes beyond stretching the debt level, instead funding 100% of the project cost. The price you pay for not putting any of your own money into the project is a profit share. Most joint venture development finance funders expect a 50/50 profit share on sale of the completed units.
Considerations when taking out mezzanine finance
Is taking out mezzanine finance risky?
As this type of funding is designed to allow you to maximise the borrowing on your project, you will naturally end up with very high gearing.
When taking out mezzanine finance, you will be personally liable for the debt, whether the loan is made in your personal name or via a limited company. When applications are made in limited company names, the lender will personally tie you to the loan by requiring a personal guarantee.
As such, should you ever default on the loan and the property be repossessed, there is a real chance that the sale price could end up being below the loan amount. This would leave you having to honour your personal guarantee and repay the difference.
Can I get finance without giving a personal guarantee?
This is very rare. A personal guarantee will be required for almost every loan.
