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Mezzanine Finance

What is Mezzanine Finance?

Second charge development loans used to plug a short-fall behind a Senior Debt facility, are known as Mezzanine loans in the UK.

Mezzanine finance is secured by a second charge and used to “top up” the senior debt (first charge) facility if a developer does not have sufficient cash resources to make the project work using senior debt alone. Whilst senior debt can generally provide up to 65% of GDV or 80% of project costs, mezzanine lenders will top up to 90% of project costs, meaning the developer has to contribute 10% of project costs.

Mezzanine finance therefore is another type of development finance, which is used to give you more money than the “senior” lender can provide. As Mezzanine finance is secured by a second legal charged, and at a higher Loan To Value, it is more costly than senior debt.

What is Property Development Mezzanine Finance used for?

Mezzanine property development finance is used to help bridge the gap between a development facility or loan, and the amount of equity or funds that a developer has to invest into the development.  The Mezzanine Lender will need to take a second charge on the land and the development, and this is classed as a “junior” position, sitting behind the first charge or the ‘senior debt’ development finance lender.

Mezzanine funding allows the developer to put less equity or cash investment into the project. 

What are the Key Features of Mezzanine Financing? 

Loans of up to 75% of the Gross Development Value, or

Loans of up to 90% of Total Project Costs (plus finance costs).

The Arrangement Fees charged by the Mezzanine Finance Providers are case by case and start from 1%

Interest Rates for Mezzanine Finance start from 12% per annum.

Exit fees are generally charged but again, case by case.

Minimum mezzanine loan size is £100,000, with no maximum loan size.

No profit share is generally required with mezzanine loans.

Up to 36 months terms available on larger schemes.

What are the Mezzanine Debt Finance lending criteria?

Mezzanine Funding is secured by a SecondCharge

It is essential for developers to be Experienced, to access mezzanine finance.

Full Detailed planning consent needs to be granted.

Valuation Reports & QS/ MS reports which are instructed by the senior lender, can also be utilised by and addressed to the Mezzanine Lender.

Available for residential and commercial property development schemes in England, Scotland and Wales

Personal Guarantees will be required.

What Information do you need to progress an Mezzanine Finance loan?

Applicant Details, and Company name & number.

Directors & shareholders CV’s or experience details.

Development Site address.

Details of senior lender and copy of Senior Debt offer letter.

Copy of the planning consent.

Detailed Financial Appraisal and Cash-Flow.

Detailed build costs/ quote.

Schedule of Accommodation.

Full Details of the professional team (contractor, architect, structural engineer, CDM co-ordinator and so on).

Procurement Method. For example, Design & Build or Construction Management?

Comparable Sales details (or agent’s opinions) to support the GDV.

FAQs

Can I use Mezzanine Finance for property development?

Yes. There is an abundance of mezzanine finance providers currently operating in the property development space. Typically, a bank or funding institution will only fund a certain percentage of the project costs. If that bank loan amount does not quite work for a developer, given he or she doesn’t have enough cash to cover the rest, mezzanine finance can be utilised.

Why would I use mezzanine funding?

There are plenty of “stretched” senior debt & even Joint Venture options today, so why would you use mezzanine? In cases where you already have an existing relationship with a senior debt lender, or where the senior debt offer is at such a good interest rate or over-all cost, it makes sense to top-up that senior debt with some mezzanine money. As mezzanine finance is on a “debt” basis, there is no profit share required.

Is using Mezzanine finance for property development risky?

Naturally, if you are looking to borrow as much as you can, and therefore your cash contribution is kept to a bare minimum, then the lender(s) are being asked to climb higher up the “risk” curve, given they will be at a high Loan to Value, or Loan to Cost. With that risk, comes a higher cost of finance, and less “wriggle” room, should the project run over-time/ budget, or sales do not come in when anticipated, or at the projected Gross Development Value.

How much does mezzanine cost?

A standard mezzanine loan would include an arrangement fee (typically 1% to 2%), an interest rate (can vary dramatically, but typically starting from 1% per month), and sometimes an exit fee (typically 1% to 2%). Given the mezzanine lender will be secured by a second legal charge, the cost of such finance reflects that.

Do I have to Personally Guarantee mezzanine finance?

Yes, you do. A second charge loan is a rather risky position to be in, from a lenders perspective, so not only do the mezzanine lenders charge handsomely for their loan, but they will also expect you to give a PG, to keep you 100% committed to repaying them.

Can you introduce me to a Mezzanine Finance Lender?

Yes, that’s our area of expertise!

If you want a fast, flexible and reliable service, try
Positive Commercial Finance.

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