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Mezzanine Finance

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

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, leaving the developer to contribute the last 10%.

Can I use Mezzanine Finance for property development?

The simple answer is “yes”. There are 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. Where that 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 finance?

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 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 (1.5% to 2%), an interest rate (can vary dramatically, but typically starting from 1% per month), and sometimes an exit fee (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.

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