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MEZZANINE FINANCE

Mezzanine finance is a type of debt equity financing that sits between senior and junior debt.
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WHAT IS MEZZANINE FINANCING?

Mezzanine finance is a type of debt equity financing that sits between senior and junior debt. Mezzanine finance is often used to effectively top up the primary development lender’s contribution by taking out a second charge. This provides developers with the optimum level of flexibility, helping them to finish a project without sacrificing all of their liquidity in lieu of a deposit. Mezzanine finance is typically more costly than primary development finance. Since it is a second charge loan, lenders tend to assume higher risks. Nevertheless, with proper research you can find great deals in this genre of property finance. At London FS, we have extensive experience in the sector and strong connections with mezzanine finance providers. This allows us to garner the best terms and rates for our clients.

Who provides Mezzanine finance?

Mezzanine financing is usually provided by a financial institution that specialises in this type of lending, known as a mezzanine lender.

Is Mezzanine finance the right option?

When it comes to property development, mezzanine finance may be a viable option for you. However, there are several alternatives from which to choose. The most suitable path depends on your individual situation. Therefore, it’s beneficial to consult with a specialist and find out the best course of action.

It’s important to consider these criteria points when obtaining mezzanine finance. Borrowers can request up to 90% loan to cost, with terms ranging from 6-24 months. There is no maximum loan size and experienced developers are preferred. If planning permission is in place or permitted development rights are available, any loans can incorporate some of the land purchase costs.

Interest rates for mezzanine finance:

Lenders are typically risk-averse, but their loans can be quite profitable. Expect higher interest as this type of finance can be classified as expensive debt. The cost of mezzanine finance will fluctuate in accordance with the particulars of your situation. This can be determined by multiple factors such as the kind of property you are working on, its location, the loan amount you want to borrow, the deposit you can put forward and even your history as a developer. The interest rates on mezzanine loans tend to be higher than those for senior and sometimes even subordinated debt. However, if a developer succeeds in securing funding from mezzanine lenders, they may have an opportunity to make a good profit form their development.

ARE THERE ANY OTHER OPTIONS AVAILABLE?

An alternative to mezzanine finance is senior development finance, which typically works in conjunction with mezzanine finance. This kind of lending provides a lower loan to gross development value (LTGDV) and loan to cost (LTC) than other options. It may be worth exploring the amount of funding available from a senior funder before considering mezzanine finance due to the potential for significant differences in loan amounts.

Stretch senior financing is another choice for those trying to secure more funds than usually accessible through traditional senior debt. This type of borrowing enables all indebtedness to be kept with one lender and could be simpler than combining mezzanine and senior debt.

Ultimately, the best decision will come from comparing all options.

The main considerations?

As with all finance, you must look at all the pro’s and con’s. Understand the risks. We outlined a few points to consider which your broker will discuss with you:

What are the risks?

Taking out mezzanine financing may be a lucrative move, however it does come with its risks. Borrowing at high gearing increases your exposure – if the market turns, or your project runs into problems, you might have to personally repay an amount that is higher than the sale price of the asset. Personal guarantees can also leave you feeling vulnerable: if the property cannot cover the loan then you will have to pay off the difference from your own pocket.

Personal guarantee

In our experience a personal guarantee will be required by lenders.

WHY SPEAK TO A MEZZANINE FINANCE SPECIALIST?

At London FS, we have a long history in providing mezzanine finance. If you have any questions, would like to understand what your options are, or need guidance on the best course of action for your development, we’d be delighted to discuss it with you at a time that suits.
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