How to Raise Mezzanine Funding – What You Need To Know
Mezzanine funding can enable a property developer to bridge the funding gap between their senior facility and equity input but how to raise mezzanine funding can be problematic. Many banks (often referred to as Senior Lenders) that offer development funding will limit their risk by not lending beyond a certain loan to cost, or loan to value.
This maximum loan to cost may, for example be 65% of the total costs (these may include the land cost, construction costs, professional fees, etc). If the developer only has cash to cover another 10% of these costs then there is a bridge to gap through mezzanine finance.
The structure of mezzanine finance can enable a property developer to their funding gap but how to raise mezzanine funding can be problematic.
If you are considering how to raise mezzanine funding then there are often a range of factors that you will have to consider. Including:
a) A mezzanine finance provider will only have second charge security and, therefore, with their higher risk of mezzanine debt will come higher rates of interest
b) Usually, but not always, you will have to prove that you have 10% of the build costs in equity of your own
c) Most mezzanine finance providers will expect you to demonstrate a successful track record in property development. A mezzanine finance provider will want to ensure you finish the project as proposed so they can recover their capital and interest!
d) Some mezzanine finance providers will limit their lending to geographic areas. This might be close to their office base, within areas they consider are saleable or perhaps simply excluding areas such as Scotland where the legal process is different.
e) Another key element to consider when looking at how to raise mezzanine funding will be to check that your mezzanine finance provider will accept your type of development. For example some mezzanine finance providers will not consider commercial projects, retirement schemes, purpose built student accommodation, etc.
The mezzanine finance will usually be invested on day 1, in one facility alongside the developers cash.
Raising Mezzanine Finance Without a Broker?
Going direct to a mezzanine finance provider is usually easy and could save you time and broker fees but should be done with careful attention to providing the right information.
When considering how to raise mezzanine funding it is also important to consider how you present this information too. Get the balance right with enough relevant information and presented in a professional format will be very important. www.investopedia.com provide a good guide on the subject and as part of how to raise mezzanine funding we will be soon providing Ten Tips for Raising Development Funding.
Raising finance for property development is made simple using our independent comparison website.