Mezzanine Financing; the pro’s and con’s

When understanding the characteristics of mezzanine financing it is useful to be clear on the pro’s and con’s of this type of property development funding. Mezzanine financing is a funding facility that is used in additional to a developers own cash equity to support the loan to cost criteria, and/or the loan to value, of a senior lender. Mezzanine financing is, therefore, often used when a developer has insufficient equity of their own to fund a property development.

The Pro’s

  • Mezzanine financing can help a developer spread financial risk
  • Developers can increase their development capacity
  • This may mean a developer can start a new development whilst completing a current project
  • In theory a developer could increase return on investment
  • Mezzanine debt and interest will usually be rolled up and payable at the end of the term

The Con’s

  • A mezzanine lender will have subordinate security to the senior lender and, consequently, with their increased risk will come increased interest rates
  • Interest rates may reach 24%p.a. plus fees
  • Interest may be compounded although most will calculate on a simple basis
  • A developer will have to work with two lenders and the mezzanine capital provided by the Mezzanine lender will also have legal and administrative costs that may include a second formal valuation report
  • The mezzanine lender will have a second charge and will be repaid before the developer

What is Mezzanine Financing?

Mezzanine financing bridges the gap between a developers available cash (equity) and the available development funding debt from a senior lender and this may not exceed 70% LTV

Typical Mezzanine Finance Requirements

  • Most mezzanine lenders will expect a developer to contribute a minimum of 10% of the total costs – so called ‘skin in the game’. However, in some cases, planning gain may be considered as equity
  • The total loan (both senior and mezzanine) will not be able to exceed 70% although this may only include the net mezz facility
  • The net profit will need to exceed 15%+ otherwise there may not be sufficient margin in the event of any over runs
  • Interest rates will range from 1% pcm to 2%pcm
  • The mezzanine lender will want to be comfortable with the senior lenders inter-creditor agreement

We provide a fast, online property development funding search service that will enable an easy comparison of mezzanine loan rates. Simply enter the key information about you and the project and we will match against the available loan facilities.

Leave a Reply

Looking for mezzanine financing?

error: Content is protected !!