Mezzanine debt blurs the lines between what constitutes debt and equity and provides access to additional loan capital where a bank will typically restrict the LTC to 50-75%. Secured by a 2nd charge and depending on the loan a personal guarantee may be required.
A minimum 10% of borrower equity /collateral is required up front for this type of financing and where the borrower has added value such enhanced planning the uplift in land value this could represent borrower contribution. The turnaround to get the loan is quick and at Assured we have established relationships with senior lenders who work with us to deliver.
It’s perfect for financing solutions where project timescales are 6-24 months hence more commonly known for being used by property developers, this is usually the case where a developer looks to deploy capital over several sites.
Having worked for a large corporate bank very few clients would use Mezzanine finance as an additional lend, this could have been because they didn’t need the extra funding, or because it was lending they didn’t understand and their bank was not receptive to permitting a second charge behind their senior debt.
Mezzanine finance carry’s a premium over senior to reflect the additional risk, but this finance solution has some great unique benefits such as;
- Interest can be rolled into the loan. So, deferring some or all of the interest for a period of time.
- Flexibility with covenants and can make a decision that is seen as riskier than most banks would be willing to take. For example; Banks tend to stay between 50-75% Loan to Cost (LTC)and 55-65% Loan to Gross Development Value (LTGDV) covenants but with Mezzanine funding it is often stretched to 90% LTC and up to 75% LTGDV. This obviously depends on the capability of the borrower, the scheme and the current market.
- The terms are negotiable unlike many other forms of debts. They work on the best deal for all parties.
Mezzanine Finance represents a higher-level risk although it does not mean they will lend to anyone. It means they will rely on the borrower to have the right information and experience to undertake the project presented.