Mezzanine development finance or Mezzanine loan provides a second layer of debt finance (debt with a 2nd position lien also known as Junior Mortgages). It is provided to bridge the gap between the level of senior debt finance (typically going up to 60%) and the developer’s or the investor’s equity investment into the project or the purchase; a second charge usually secures it.
The Mezzanine piece size is typically between 20%-30% of the loan value. Mezzanine development finance reduces the burden on current cash flow and thus helps the project sponsor to manage his finance as well as his actual liquidity.
The Mezzanine loan takes up between 20%-30% of the financing that the borrower must have to realise his project.
A property developer wants to convert an office building with PD Rights to residential flats
The project is a profitable project with a gross development value (GDV) of £ 24,000,000
His total costs (purchase and development) are £ 20,000,000
A senior lender agrees to lend him only £ 12,250,000, 61.25% loan to cost (Ltc)
He then approaches a Mezzanine lender that will give him £ 4,750,000
The total loans that he has borrowed is equal to 85% loan to cost of the project
With a combined debt of £ 17,000,000, the developer needs only to contribute 15% of the total costs to realise the project. There are also other types of property finance that involve an equity piece, and then the combined loan can be up to 100% development finance, (100% loan to cost).
We at property finance partners analyse and present the whole picture to our client. We concentrate on the entire lifetime of the project from the beginning till the end and focus specifically on the timing that the finance is needed.
Also, the interest on the loan is tax-deductible therefore for instance:
If the interest of a mezzanine loan is 14% per annum and the standard corporate tax is 20%, so the real interest rate that we have to consider is 11.2% per annum.
The mezzanine loan is easier to manage. In most of the loan agreements the mezz piece can be paid or regularly or by rolling up to the loan balance and being paid at the end of the project after the capital loan, it reduces the burden of the ongoing cash flow during the project life.
It is important for the borrower to be able to make a professional comparison, among all the lenders that offer mezzanine loans.
Not all the mezzanine loans are the same and have the same conditions, however, above all there are issues like flexibility and customer service that you cannot measure them with numbers, but only from your personal experience.
We always provide our clients with a professional, honest and transparent opinion about each offer and an opinion about other issues that they cannot see in the numbers and the written offer.
There are cases that its worth to pay a slightly higher interest rate but to get a real strategic finance partner that will be beside you all the way until the successful completion of the project and afterwards for different projects in the future.
To find out how we can help, call today on 020 3393 9277