Mezzanine Finance is a secondary loan used to help complete development projects.
Plug The Gap
Existing Finance insufficient? A mezzanine loan may be able to provide further finance.
Mezzanine finance sits behind the prime lender and acts as a second charge for the development.
Helping Your Mezzanine Finance Needs
A Mezzanine loan is a type of loan that can be used to “plug the gap” if a Developer already has existing finance in place, but there is a shortfall in the funding. It can help to prevent delays and ensure the development is completed in a timely manner preventing expensive delays.
This type of loan acts as a second charge for the development and sits behind the primary lender. The majority of mezzanine finance providers will lend up to 20% of the gross development value.
Typically the breakdown of funding is as follows:
- Primary lender: 70% of the total cost
- Mezzanine lender: 20% of the total cost
- Developer: 10% of the total cost
As well as supplying the necessary finance to finish a project, a mezzanine loan can also reduce the amount of personal capital tied up in the project from the developer. Reducing the amount of capital invested in a single project may allow developers to take on multiple schemes at the same time, diversifying their portfolio.
Features of a Mezzanine Loan
A mezzanine loan is often suitable when a developer needs a more flexible type of funding solution as it allows greater freedom than other types of loan; providing a substantial amount of funding with terms that can be tailored to the requirements of the developer.
Why are they a popular type of finance?
- They can enable developers to secure the extra funding they need to finish projects
- Can be arranged and in place quickly
- Typically provide up to 20% of the GDV
- Repayment terms of 12-24 months
Like Bridging Finance, Mezzanine lenders usually provide the option for the interest to be “rolled up” and paid at the end of the finance term. This can help give developers peace of mind and avoid potential cashflow issues.
Who Can Secure Mezzanine Finance?
It is worth noting that not all developers are able to access this type of finance. Given that it is viewed as higher risk lending by the finance provider, it is usually restricted to experienced property developers with a strong portfolio of successful projects. This helps maximise the possibility that the loan will be paid back in its entirety.
Subsequently this means mezzanine loan providers rarely provide funding to new or inexperienced property developers. This is because the risks involved with providing secondary development finance to someone without experience or a portfolio of successful past projects is much higher.
However a finance providers may agree to lend to an inexperienced developer, the loan will almost definitely come with a much higher interest rate than a typical mezzanine loan.