The basics of Mezzanine Finance
Mezzanine finance is, in it’s simplest form, second charge development finance. You would normally have Development Finance (in the form of senior debt or stretched senior debt) that is secured with a first charge. Mezzanine Finance is normally used to sit on top of the first charge, as a second charge and increases your Loan to Gross Development Value and potentially your loan to cost.
Normally as a rule of thumb, you would have senior debt as your Development Finance, that would go up to about 65% Loan to Gross Development Value (LTGDV) or up to approximately 85% Loan To Cost (LTC). Mezzanine Finance then comes in on a second charge, sits behind the first charge holder and they would increase the loan to GDV up to approximately 70-75% LTGDV and your Loan to Cost up to a maximum of 90% LTC.
All Lenders will expect to have a minimum of about 10% of the cost of the project in the deal. If your total acquisition and build costs are £1 million, you’re expected to have £100k in that deal.
In terms of interest rates, Mezzanine Finance is substantially more expensive than senior and stretched senior debt. Senior and stretched senior can be anywhere between 7-12% per annum, maybe a little bit less if you’re a more experienced developer. Mezzanine Finance normally comes in anywhere from 14-30% per annum.
The reason it’s more expensive is because it’s the smaller and riskier tranche of the finance for the deal. The Mezzanine tranche normally always goes into the deal first, even though they’re the second charge holder. This means they will always have their money in for the entirety of the deal.
It’s the risker money because if the first charge holder repossesses, they have no obligation to pay back the second charge holder. So from the second charge holder’s perspective their position is very uncertain which is why they charge more interest.
In terms of who Mezzanine Finance is available for, it’s really a case of having a couple of deals under your belt and making sure the deals stack and you stack as the developer. Once you have some experience behind you Mezzanine Finance should be available to use.
Written by Michael Primrose & Christopher Yong