What is Mezzanine Development Finance?

Nowadays developers are constantly looking for new ways to fund their projects. The developing financial landscape means that it is now increasingly common for developers to have structured financing arrangements that are made up of various different components, including mezzanine finance.

One option for property development financing is to arrange Mezzanine funding. This is a specialist way to raise capital that is part debt & part equity finance. It is a high-risk form of lending but offers some of the highest returns & is commonly used by property developers to get their projects off the ground.

In the past, property developers would fund their projects through a combination of their personal capital & finance from specialist lenders or bankers. However, the financial landscape is now changing. In recent years there has been a reduction in senior lending, & some lenders will no longer provide the full funding for developers needing to see their project through to completion.

As a result, it is not unusual for there to be a shortfall between the budget & the total cost of a property development – a situation which is causing headaches for property developers across the UK. 

Mezzanine development finance is used by property developers in situations like this, where there is a shortfall in funding which cannot be plugged by the developer’s own funds. It provides a speedy way for borrowers to source finance to ‘plug’ that gap. It is effectively a business loan where the debt becomes an equity share after a certain timeframe has passed, meaning that the equity in the business is used as security.

Mezzanine development finance acts as a second charge behind the main lender for the development & allows developers the freedom to minimise the amount of personal capital tied up in a project which also opens up the opportunity for developers to invest in various development projects at the same time.

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When Can Mezzanine Finance Be Used?

Mezzanine development finance is regularly used by property developers for a number of different types of building projects including land purchase costs, development costs for residential new-builds or refurbs, or the purchase or development of commercial property. 

Typically it needs to be invested into the development on the first day of the project & is not used in situations where there is an unexpected shortage of cash when the project is only partly completed. As such it needs to form part of the property development financing plan from the outset.

How Does This Type Of Property Development Funding Work In Practice?

Let’s look at a real life example. If a developer wants to purchase a £2 million property but can only secure £1.5m in property development loans, they may not have £500k available in personal funds to make up the shortfall. The amount they can personally invest may only be £300k so they decide to approach a mezzanine lender to provide investment to cover the shortfall.

The mezzanine lender then agrees to provide £200k & this finance plugs the gap in funding & allows the project to go ahead as part of the overall property development financing plan.

How Is It Different From Other Forms Of Finance?

Mezzanine development finance is more flexible than other types of loan facilities & is very popular with property developers. It allows borrowers to secure necessary funding quickly – normally within 28 days – & borrowers can also arrange a flexible repayment plan that suits their own situations & circumstances. 

The finance is usually offered over a term of between 12 & 60 months although longer terms do occur. Lenders typically require a profit share as well as charging interest on the development loan itself & if a developer fails to adhere to the terms of the loan then they maybe required to forfeit equity in their company. 

What Are The Charges On Mezzanine Development Finance? 

Mezzanine finance is a great way for property developers to access additional capital & take advantage of further business opportunities.  For lenders however, mezzanine loans are a relatively high-risk product compared to property development loans & mezzanine finance providers almost certainly take on a level of risk that other lenders do not. 

The lenders of mezzanine finance will always expect a high chance of return & are likely to demand higher interest rates or an agreement for profit sharing in order to safeguard the loan.

Who Is Eligible For Mezzanine Development Finance?

Most mezzanine finance borrowers are experienced property developers with a strong portfolio & track record of delivering successful projects. 

A strong background in successfully delivering commercial development projects reassures lenders that the probability of repayment is high. Those who have used mezzanine finance as part of an overall property development financing plan previously are prime candidates for lenders. 

Mezzanine finance providers rarely offer mezzanine loans to new or inexperienced property developers. This is because it is too risky for a lender to provide additional finance to a developer that has little to no experience or track record of successful projects, as the probability of issues with repayment are significant. 

A bridging loan for property development as well as more specialised property development loans may be an option for those who cannot access mezzanine funding. 

Our friendly team of experts can advise what type of property development financing is available for your project.

How Do Borrowers Apply For Mezzanine Finance?

No two mezzanine loans are the same & they will always be highly tailored according to the specific client. Lenders will take into account a range of different factors when considering an application for finance. 

Factors include the debt structure, local market conditions, the size of the loan & its duration. The quality of the supporting & supplementary information is vital if the developer’s proposal is to be approved by a prospective lender.

Arranging mezzanine finance without professional guidance can be a long & drawn out process, with no guarantee of success at the end. This is because nearly all mezzanine finance providers deal exclusively with professional finance brokers who operate in the financial services industry. 

Property development financing can be a lengthy & complicated process for developers. Lenders tend to require very detailed information from the developer, along with a range of complex paperwork. Property developers who are looking to fund their project through mezzanine finance are advised to contact a specialist property finance broker to ensure that the mezzanine loan is appropriate, with fair terms & the best available market rates.

Our property development finance team are ready to help you progress your next project. Please call us on 01202 612934 or complete our Quick Enquiry form & we can advise the best solution for your needs.