Benefits of mezzanine development finance
Key benefits of mezzanine development finance solutions include:
- Access to more funding
- Flexibility
- Reduced capital/equity contributions
Mezzanine finance can help developers bridge the gap between the equity they have available and the total amount they need for a development project and may be necessary for large-scale building projects.
What is mezzanine development finance?
Mezzanine property development finance is a type of finance that sits between senior debt and equity. It is typically used by property developers to finance the construction of new properties or the refurbishment of existing ones.
Mezzanine finance is typically provided by a mezzanine lender, such as a private equity fund or a pension fund. The mezzanine lender will typically take a second charge on the property, which means that they will be repaid after the senior lender in the event of a default. As they sit in second-position on the deal, they may have a higher interest rate than the senior debt development facility.
How does mezzanine development finance work?
The mezzanine development finance facility will typically be put in place after indicative terms from a senior-debt development finance lender have been sourced. The facility would typically be structured as follows:
- Loan amount: The lender will provide a loan of to a maximum level depending on the value of your finished project. This is commonly expressed as a maximum LTGDV, for example, “75% LTGDV”. This stands for “Loan to Gross Development Value” and means if your project will be worth £1,000,000 when it is fully built, the funder would lend a maximum of £700,000.
The amount offered will be less than the senior-debt development facility and often acts as the final amount required to make the rest of the project’s finances work. - Loan term: The loan will be provided over a fixed term, typically between 6 – 18 months and will generally align with the development finance facility.
- Interest rate: The lender will typically charge a monthly interest rate, which will be calculated on the outstanding loan balance throughout the term of the loan. Rates may be higher than the senior development facility.
- Security: The loan will be supported by a secured legal second-charge against the property being developed, providing the lender with security in the event of default, sitting behind the senior-debt development lender.
- Repayment: The loan will typically be repaid as a bullet payment after the development has completed.
- Fees: The lender may charge certain fees for arranging the loan, such as an arrangement fee and/or exit fee. They may require a separate valuation to that instructed by the senior-debt lender and solicitors’ charges will likely apply. We will outline all costs clearly so you are fully informed of associated charges and can compare solutions properly.
