Mezzanine Finance

Mezzanine finance is an important ingredient in property development, and it enables developers to take on opportunities they’d otherwise struggle to fund

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Retaining flexibility is the key to success in the ultra-competitive property development sector, and it’s vital for any property developer to remain adaptable when creating opportunities for profit. In any property development scenario a wide range of finance options is available, and the ability to utilise mezzanine finance as an additional funding source can be highly advantageous to developers that need to put together a cohesive financial structure using several funding streams.

The use of mezzanine finance is widespread throughout the property development industry, and large developments in particular often necessitate the use of mezzanine finance. It’s important to bear in mind, though, that while mezzanine finance is often an integral part of a developer’s financial architecture it should not be considered a “no brainer”; like with any other financial product, misused mezzanine finance can prove to be detrimental to a developer’s continuing business objectives. The sheer flexibility of this type of finance and the many different varieties on offer means that there’s an often bewildering number of options available to borrowers, so it’s important to consult a financial advisor before making a commitment; they’ll be able to guide developers to the correct finance product for their needs.

How is mezzanine finance used in property development?

Mezzanine finance is a key element of many developers’ financial plans. This type of finance is used to complement other funding sources such as bank loans and capital, and constitutes an additional financial element rather than a standalone funding product. Mezzanine finance takes its name from a “mezzanine floor”, a floor that typically sits sandwiched between the ground and top floors, and is often open to other floors in the building. This reflects the role it plays in development finance: mezzanine finance is senior to equity and shares, but is subordinate to secured loans and bank finance - it occupies the middle ground, hence the name mezzanine.

Mezzanine finance fulfils a crucial part of development finance because it enables developers to “top up” their capital without providing any additional security. Mezzanine finance is unsecured, and though this makes it more expensive, it also means that it doesn’t need to be backed by assets, so borrowers aren’t limited by the value of their assets. This can be useful in many situations, and makes mezzanine finance a crucial element in many large development projects.

For example, let’s say a developer wants to buy up a block of flats for £10 million. They may only have £1.5 million of their own money, and though they can take out a development loan to finance the rest of the purchase (which will be secured against the property), they can only borrow 75% of the building’s purchase price. This leaves them with a £1 million shortfall that prevents them from proceeding with the project, but mezzanine finance can be used in this situation to provide the necessary capital. The mezzanine finance will constitute the additional £1 million deposit provided by the borrower and will enable them to complete their purchase.

Who uses mezzanine finance?

Mezzanine finance allows developers to minimise the amount of capital they need to provide in order to take on a project. In the above example our developer is only putting up 15% of the property’s value, which means they’re still able to take on other projects simultaneously. They can remain flexible without becoming tied down to one particular development, which is absolutely crucial in an industry as fast-moving and complex as property development. Mezzanine finance therefore plays a critical role in enabling property developers to maintain financial flexibility.

Mezzanine finance is often used by smaller companies as a means to leverage their assets into much larger acquisitions. In our example above, the developer is still putting up a large chunk of capital in order to finance their project. However, many smaller developers might not have £1.5 million to invest in such a venture, and may only be able to provide a much smaller sum; in these cases, mezzanine finance can constitute a large percentage of a project’s total finances.

Using mezzanine finance

Mezzanine finance is an ideal counterpart to other lending products, and is often used in conjunction with bridging and development loans. It’s important to bear in mind that the most significant difference between these types of finance is the nature of the loans themselves; while development and bridging loans are both secured against property, mezzanine finance is not. While this allows borrowers to easily top up the capital they need for a development project, it does represent a riskier proposition for lenders; they have no assets with which to reclaim their money if the borrower doesn’t pay them back, and will struggle to recoup any losses. Therefore, mezzanine finance providers need to offset this risk with higher costs, in order to guard against the danger of default.

Mezzanine finance providers understand that the additional burden of a high interest rate can prove detrimental to a developer, especially one that’s already maintaining several other loans, and so a loan structure is arranged that doesn’t place undue stress on a borrower’s bottom line. This is often achieved by structuring the types of repayment the borrower makes; instead of simply servicing the loan monthly, mezzanine financier also accept “rolled up” loan payments, which take a loan’s total interest and add it to the final repayment. This allows developers to minimise the impact of mezzanine finance on their bottom line, instead deferring all payments until they’re in a position to do so (i.e. when they’ve sold or refinanced their property).

Mezzanine finance for property developers

Mezzanine finance constitutes an important part of any property developer’s toolbox, and should be considered at every stage of a project proposal. Although mezzanine finance does contribute to the overall cost of a project, it can also be used to enable development that would otherwise be beyond reach, and as such can be considered a vital element of any property developer’s strategy. Mezzanine finance is a fast, flexible way for property developers to achieve their development goals without becoming overcommitted, and allows them to retain both flexibility and profitability.

Common Uses Of Development Finance

  • Overview

    Reliable finance is a crucial part of any successful development project, and bridging lenders offer a wide variety of attractive products in this sector.

  • Barn Conversion Finance

    Barn conversions can result in amazing properties, but require a lot of work. Specialist lenders provide vital financial backing to keep these projects on track

  • Construction Finance

    Successful completion of a property development project relies on a strong, stable source of finance from start to finish, which construction finance provides.

  • Conversion Finance

    Conversions come in all shapes and sizes, and conversion finance lenders provide the flexibility and adaptability that developers need in conversion projects.

  • Development Exit Finance

    Development exit finance enables property developers to react flexibly to changing situations, and to restructure their financial commitments to maximise profits

  • Inexperienced Developer Finance

    Inexperienced developers may well have access to lucrative opportunities, and the flexible approach of development lenders enables them to take on projects

  • Land Acquisition Finance

    Successful property development requires stable funding from the very start, and land acquisition loans are an important element of any construction project

  • Mezzanine Finance

    Mezzanine finance is an important ingredient in property development, and it enables developers to take on opportunities they’d otherwise struggle to fund

  • New Build Development Finance

    New-build projects need stable funding from start to finish, and new build development finance lenders provide the tools property developers need in this sector

  • Pre-Construction Finance

    There’s plenty of work to do before construction starts, and the costs of paving the way for a successful project must be met with pre-construction finance.

  • Property Development Finance

    Property development requires specialised financial solutions, and the UK’s development finance sector provides a variety of highly flexible funding options

  • Retail Conversion Loans

    Retail conversions can be lucrative opportunities, but developers must ensure they have appropriate funding to secure planning permissions and carry out work

  • Refurbishment Finance

    Refurbishment finance lenders provide the tools that property developers need to quickly seize and escalate renovation projects from beginning to completion

  • Self-Build Finance

    Self-build projects require a specialist touch, and there are many development lenders dedicated to providing self-build finance for precisely this purpose.

  • Site Acquisition Finance

    Moving quickly is vital for successful property development, and site acquisition finance is an indispensable part of any development finance package.

  • Unmortgageable Property Finance

    Unmortgageable property finance allow property developers to take out flexible finance solutions to refurbish and renovate properties for mortgage or resale

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