Mezzanine Development Finance
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Feb 10, 2021
A type of second charge funding designed to plug a short-fall behind the senior debt facility.
What is Mezzanine Finance?
Mezzanine finance 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. This is secured by way of a second charge, sitting behind the senior lender. Whilst senior debt can generally provide up to 55% of GDV or 60% of project costs, mezzanine lenders will top up to 85-90% of project costs, meaning the developer has to contribute 10-15% of development costs.
Mezzanine finance therefore is another type of development finance, which is used to give you more money than the “senior” lender can provide. As Mezzanine finance is secured by a second legal charged, and at a higher LTV, it is more costly than senior debt.
Mezzanine funding allows the developer to put less equity or cash investment into the project.
What are the Key Features of Mezzanine Financing?
- Loans of up to 75% of the Gross Development Value, or
- Loans of up to 90% of Total Project Costs (plus finance costs).
- Arrangement and exit fees are charged by the mezzanine finance company, typically 1% each way.
- Interest Rates for Mezzanine Finance range from 12-20%
- Loans range from £100,000 - £25M, depending on the mezzanine lender
- A minimum term of usually 6 months, again case by case
- Up to 36 months terms available on larger schemes
What are the Mezzanine Debt Finance lending criteria?
Mezzanine Funding is secured by a SecondCharge
It is essential for developers to be Experienced, to access mezzanine finance.
Full Detailed planning consent needs to be granted.
Valuation Reports & QS/ MS reports which are instructed by the senior lender, can also be utilised by and addressed to the Mezzanine Lender.
Personal Guarantees will be required.
Development cost : £10m
Senior Lender 55% GDV: £6.6m
Mezzanine Lender 90% of costs: £2.4m (max lend)
Developer contribution 15% costs: £900,000
The mezzanine lender would typically not go over 90% of costs combined with the senior lender, thus in the above scenario their maximum lend would be £2.4m, meaning the developer has to raise the remainder.
There will always be variations to the above example as both the senior and mezzanine lender work on different calculations.
Click here to view our list of Mezzanine lenders