What is Mezzanine Finance?
Mezzanine finance is secured by a second charge and is 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. This is of great value when a developer is developing a number of sites at the same time and cash flow is vital to completing all the developments.
Mezzanine finance is therefore another type of an extension of mezzanine development finance which is used to give you more money than the “senior” lender can provide. As Mezzanine loans are secured by a second legal charge, and at a higher Loan To Value it is always more costly than standard senior debt financing.
What is Property Development Mezzanine Finance used for?
Mezzanine property development finance is used to help bridge the gap between a development facility 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 itself, 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 property development project.
What are the Key Features of Mezzanine Financing?
- Loans of up to 75% of the Gross Development Value.
- 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 Second Charge behind the senior debt.
- Previous development experience is essential for developers to access mezzanine finance.
- Full planning consent needs to be granted.
- Valuation Reports & Quantity Surveyor reports which are instructed by the senior lender, can also be used by and addressed to the Mezzanine Lender.
- Available for residential and commercial property development schemes in England, Scotland ,Wales and Northern and Southern Ireland.
- 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, etc).
- Procurement Method. For example, Design & Build or Construction Management?
- Comparable Sales details (or agent’s opinions) to support the Gross Development Value.
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