While mezzanine finance generally facilitates a variety of transactions we focus on mezzanine loans for property development finance.
What Is Mezzanine Finance?
A mezzanine loan is a second-charge top-up facility that sits behind the primary loan (senior debt). For a mezzanine loan to be introduced the senior debt provider must be amenable to a second charge being registered. In addition, lenders may require inter-creditor arrangements and limitations of deeds of priority by the senior debt provider. Where two lenders lend on the same project they would ideally share the same professional team to minimize costs and streamline processes.
Since mezzanine lenders rank second in charge behind senior debt lenders, funding carries a higher risk. As a consequence, lenders charge higher rates than normal senior debt, with rates of up to 2% per month. Some lenders may moderate the interest rates charged, though against a higher exit fee to obtain a return commensurate with the risk.
However lenders structure mezzanine finance they will usually require a minimum borrower input of 10% of the project costs. This can be in cash or as an equity stake borrowers already have in the project. The typical loan structure would be 60% senior debt / 30% mezzanine debt / 10% borrower contribution.
Stretched Senior Debt
Another option to get a higher level of advance into a development project is stretched senior debt. This solution enables a higher LTC/LTGDV in advance without third party mezzanine finance. The senior debt lender may offer an advance of up to 90% of the confirmed project cost. In general, the loan to gross development value (LTGDV) is limited at 75%. Instead of a higher mezzanine interest rate, development finance lenders usually offer a blended interest rate for the full loan term.
When comparing dual lender mezzanine finance with a senior debt structure there are pros and cons. Therefore, borrowers should carefully consider their options together with their property development finance brokers or lenders.