Mezzanine Finance can be a great way of maximising the projects potential – but what is it exactly and how does it work? Here we explore mezzanine funding further.
What Is Mezzanine Financing?
Mezzanine financing is a hybrid of debt and equity finance and can be a complex area of funding. Mezzanine finance can give businesses a great way to raise more money than they possibly could from traditional sources of finance for example a business loan or bridging finance.
Mezzanine finance is a way for a company to raise funds for a specific project and could also be used in the expansion of a company.
Mezzanine loans are subordinate (i.e second charge) to senior debt (first charge loans) and bridges the gap between debt and equity funding. This type of funding can be offered in addition to borrowing provided by a main lender and be used as a top up, giving businesses an extra amount of working capital they might require.
How Can Mezzanine Finance help Property Developers?
For a commercial property developer, mezzanine finance is a great product to have available. Property developers often have a substantial funding gap to fill and mezzanine lenders can top up to 90% of project costs, this means that the developer has to only contribute 10% of the project costs with a Gross Development Value (GDV) of up to 75% overall.
When offering a mezzanine loan the lender would potentially have different agreements drawn up, for example:
- to receive their initial investment back with a percentage of the development profit or/&,
- they may charge a rate of interest.
Mezzanine loans typically do not require payment during the term of the debt, only at the end of the term. This enables a company to improve its cash flow.
What type of assets can be used.
- Residential Properties - For people to live in such as a new build development.
- Commercial properties - such as Offices, Retail Units, Hotels etc.
What is the cost of Mezzanine Finance?
In regard to the interest rate charged this would depend on various details that would include:
- The project – full details would be required, plans, costs GDV etc.
- The experience of the developer – This is important – the developer must be experienced in developing properties and be able to prove their track record.
- The loan amount.
- The developers deposit input.
- Location of the development.
Here is an example of how Mezzanine Finance could work:
|Development Requirement||£8 million|
|Standard Loan Agreed (70%)||£5.6 million|
|Mezzanine Loan Agreed (up to 85%)||£1.2 million|
|Your Own Funds (15%)||£1.2 million|
So by using debt you would only have to put in £1.2 million instead of £2.4 million - this method allows developers to take on larger projects or additional projects.
How Much Can I borrow?
Mezzanine funding can range from £350,000 to £10,000,000 although some lenders may go above this for the right development. Lenders can normally fund up to 90% of the project costs.
How long can I borrow the money for?
Mezzanine loans typically range from 6 – 24 months. In some cases a lender maybe prepared to go further.
What are the pros and cons of Mezzanine Finance?
- Can be quick to set up - 4 to 6 weeks.
- Borrow up to 90% of the projected costs with a GDV of 75%.
- Additional borrowing allows you to achieve your goal.
- It can be flexible and tailored around the project.
- Interest payments may be tax deductible – so speak to your accountant about this.
- It is more expensive than traditional lending.
- There can be in-depth terms and conditions attached.
- Personal Guarantees will be needed.
- If the project does not work out as planned you could be left with a debt.
How else can Mezzanine Finance be used?
It can be used to finance a business buyout. In this situation it is the ‘Business’ in its entirety, which is being financed.
How to Arrange Mezzanine Finance?
This is a complex area and many lenders have different propositions, so you need to speak to an experienced adviser in this area. You can call us directly or complete the enquiry form where you can schedule a call.
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