- 26th June 2020
- Posted by: DMM
- Categories: Development Finance, Mezzanine Finance
Specialist mezzanine finance brokers are seeing a resurgence of interest in this post-lockdown world that the property market is tentatively stepping into. The major senior lenders have been generally reducing their loan to value (LTV) down with credit committees being very cautious and wanting to focus on existing loan books. Existing borrowers are still having new deals considered but the new tighter loan criteria is still having to be contended with.
Mezzanine funding could be a means for developers to fill the gap in the new tighter lending criteria. A similar pattern appeared after the last housing recession from 2009 to 2011 when high street banks again drew back on their LTV. It was in this period that a number of specialist mezzanine finance brokers and lenders carved out a niche to bridge the funding hole.
Mezzanine finance provides property developers with another tier of equity to bridge the gap between their actual available cash and the senior debt facility. The three elements combined complete the 100% funding for the acquisition and build of a project. Mezzanine lenders will usually go to 70% LTV, being the gross senior debt plus the net mezz debt. Loan to cost (LTC) will be limited to 85-90% although there are some ‘super mezzanine’ products that may improve on that.
Typically, the mezzanine facility will go in first, together with the developer’s cash, to assist in the acquisition. The senior lender then provides the monies to build the project via monitored drawdowns.
“mezzanine finance brokers can help negotiate reduction in such fees and evaluate the overall benefit of the structure”
Finding specialist mezzanine finance brokers
Securing mezzanine capital can take longer than funding with just one lender but the process is much the same requiring a QS appraisal, formal valuation and the usual legal due diligence. Presenting the project correctly will be essential to the borrower and in this specialist mezzanine brokers will play their part.
The senior lender will take a first charge on the development site whilst the mezzanine lender will take a second charge. Upon the sale or refinance of the project the property developer will get their equity back together with any residual profit.
It is perhaps obvious to say but having two lenders will increase initial fees with an extra tier of monitoring, valuation and legal fees to be found. Specialist mezzanine finance brokers can help negotiate reduction in such fees and evaluate the overall benefit of the structure.
Post lockdown, the property market has hit the ground running and pent up supply of demand is keeping agents busy and pressure on prices. However, mezzanine lenders will be as cautious as their big brother lenders when it comes to the long term and so may seek additional security. Equally, it is not always a given that a senior lender will accept a 2nd charge lender due to the potential impact of their ability to act quickly.
It is likely, therefore, that property developers are going to have to adapt to this changing financial structure and begin to understand mezzanine finance and the likely rates. The longer-term outlook for GDV remains uncertain and we await to see how valuers will adapt too. In the meantime, property developers will continue to explore mezz finance and specialist mezzanine brokers should expect to be busy.
Developer Money Market are specialist mezzanine finance brokers and can assist developers in assessing their funding requirement and open doors to key mezzanine lenders still in the market. Developers can search and compare rates immediately online here for mezzanine funding options or email [email protected] for further assistance.