Mezzanine Debt – What Is It?

Mezzanine Debt

Whilst property development mezzanine debt has been around for many years, it remains surprising how many property developers are still unaware of this type of funding structure.

During the last recession many of the leading high street banks significantly reduced their maximum loan to value or, indeed, withdrew completely from the marketplace.

This left many property developers with an issue; either put in more cash equity of their own (which might have been impossible) or acquire smaller projects that require less finance. This is fine for many but a new breed of mezzanine funders took an opportunity to offer another option to builders.

  • Up to 70% (of costs) facilities from senior lenders
  • Developers put in another 10% of costs
  • Mezzanine funding bridges the gap

Mezzanine Debt Structure

This new funding structure came in the shape of property development mezzanine funding.  This bridged the gap between what a large bank may offer (at say 65% of total costs) and the equity that the developer may have available (say a minimum of 10% of the costs). So, this gap of 25% can be filled by a property development mezzanine debt solution from a specialist lender.

Property development mezzanine funding can help developers limit their cash equity to just 10% of costs which can enable more ambitious projects being possible.

In most cases, albeit not all, the high street bank will accept a development mezzanine funding structure.  The banks position will be in a priority position of having a first charge. An agreement between the mezzanine funding lender and the high street bank will have to be agreed and this is usually referred to as a Deed of Priority.

The combined equity from the property developer and the mezzanine finance will then reduce the total loan to value.   The mezzanine finance will usually be invested on day 1, in one facility alongside the developers cash for the site acquisition with then the senior bank providing the construction funding through the life of the remaining project.

The mezzanine finance will usually be invested on day 1, in one facility alongside the developers cash.

Key Features of Development Mezzanine Funding

  • Increases the return on developer equity
  • Can enable developers to take on additional projects
  • Accelerates business growth
  • Helps forge relationships with senior lenders

Mezzanine funding for property development does, therefore, enable developers to take on larger projects, or possibly additional projects, than their cash may have otherwise made possible. Naturally such mezzanine finance does not come cheap but many developers will consider a reduced profit is better than not being able to undertake a project at all.

Mezzanine financing doesnt just apply to property development and can be used for a variety of different sectors as explained on www.investopedia.com

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