Summary:
Mezzanine Finance in property development finance is often a second tier of lending, usually at a higher interest which may also be convertible into equity. For example, the principal lender may lend 65% LTV on a property with a first charge and the mezzanine finance may provide an additional 20% LTV on a second charge over the property.
Mezzanine finance can be used to fill the gap between primary bank funding and the actual amount required for your development. Mezzanine funding is far more expensive than the initial funding as there is more risk involved.
The advantages of mezzanine finance are:
- It fills the gap between the bank lending and the cost of the development.
- It can provide cash flow at a crucial time in a development and can often be put into place quickly.
- It can allow you to spread your risk amongst more projects and grow a company more quickly.
The disadvantages are:
- It is expensive funding with high interest rates, perhaps 2.5% per month.
- It is riskier then joint-venture funding where profits are shared.
- It is only likely to be available to developers with a good track record.
Mezzanine Finance is complex by definition and the advice of a good independent broker is recommended.
