Our Mezzanine Finance
FREE Mezzanine Finance Advice
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As a property developer, you may be ready to embark on your next project but need extra funding to get started. This could be because you don’t have adequate funds to cover the shortfall between the loan you’ve secured and the total development costs. Or it could simply be because you don’t want to invest all of your capital to cover the shortfall. This is when mezzanine finance can benefit you.
At Trinity Finance, we understand the need for a solution to reduce the deposit contribution for your residential or commercial project. When using mezzanine finance, your cash flow is improved, you have a higher return on your investment and you can take on additional projects. We can arrange bespoke mezzanine funding for you, enabling you to get your project underway and helping to maximise your profits.
What is mezzanine finance?
Mezzanine finance allows you to borrow more for your development project as a top-up on the development finance already secured from the main lender. It essentially bridges the gap between your deposit and the original loan. You can either receive the funds in a lump sum or in stages as your project progresses. As a short-term loan, it’s usually taken out for between 12 and 36 months. With this type of funding, you pay interest but also agree to give the lender a share of the profits from your development.
How does mezzanine finance work?
The lender for the mezzanine finance places a second charge against the development. This means they are second in line to recoup their funds after the senior debt lender has been repaid. As mezzanine lending involves more risk, you’ll be charged a higher interest rate. In return for providing the funds you need, the mezzanine lender will usually take a percentage of the profit generated from your development. The more they contribute towards your project’s funding, the higher this percentage will be.
For example, the original lender funds 70% of your project, you pay 10% and the mezzanine lender provides the remaining 20%. When the development project has ended, both you and the mezzanine lender take a share of the profits. The agreement may be for you to take 65% and the mezzanine lender to take 35%. If, however, the original lender provides 70% of the funds, you contribute a higher amount of 15% and the mezzanine lender offers a lower loan of 15%, the agreement would be for you to take a higher percentage of the profits, such as 70%, and the mezzanine lender to take a lower share of 30%. Not all lenders take a percentage of the profits. Some prefer to agree on a fee or to charge you more interest instead.
Why use mezzanine financing?
As we mentioned earlier, mezzanine finance covers the shortfall between the development finance secured from the main lender and the amount you’re able to invest in the project. You can use it to help fund residential or commercial projects. For example, it can:
- Help towards the cost of buying land
- Contribute towards renovation, conversion and extension project costs
- Cover the development costs of new builds
- Provide extra funds to continue with part-build projects
- Assist with the purchase or development costs of commercial properties
Using mezzanine finance as a top-up loan reduces the capital you need to invest. This saves you from having to raise such a high deposit to begin your project. It also helps to improve your cash flow as you’re not tying up all of your money in the project. You’ll benefit from a higher return on your investment and have more capital available, which will enable you to take on more projects at the same time.
How much can you borrow with mezzanine finance?
Mezzanine finance providers vary on the amounts they offer borrowers with some loans starting at £50,000 and extending to several million or no maximum loan amount. They generally cover up to 90% of a project’s total costs. Senior debt lenders typically offer up to 70% of the costs, meaning you can expect to receive a mezzanine loan for 20% and contribute 10% of the costs yourself. For example, the total cost of your project is £10 million. The main lender has agreed to provide a development finance loan of £7 million. Rather than you having to pay the remaining £3 million, you can arrange a mezzanine loan for £2 million so that the capital you need to invest is reduced to £1 million.
Eligibility criteria for mezzanine finance
To secure mezzanine funds, you need to be an experienced developer with a number of successful projects in your portfolio. This is because of the risk taken on by mezzanine lenders. The more experienced you are, the more confident a lender will be to offer you the funds you need.
Lenders vary in their criteria but they usually require:
- Proof that full planning permission has been granted
- Access to reports carried out by the senior lender, such as QS reports and valuations
- A personal guarantee
When you apply for mezzanine finance, the senior lender will also need to agree to this. As you won’t have invested as much capital yourself, this increases their risk as you have less commitment to repaying the loan should any issues occur with the project. Again, your proven track record as an experienced property developer will determine the outcome.
We can arrange your mezzanine finance
Mezzanine loans are a niche type of funding and most of the providers only offer their services via brokers. At Trinity Finance, we work with these specialist lenders and can check your eligibility for mezzanine finance. Each application is processed on a case-by-case basis so you can rest assured that you’ll benefit from the best mezzanine finance rates and terms available to suit your needs.
To speak with one of our expert financial advisers – located throughout Kent, London and Edinburgh – about your loan requirements, just give us a call on 01322 907 000. If you prefer, send an email to us at firstname.lastname@example.org or an enquiry via our contact form. One of our mortgage and protection brokers will reply to you with more information about the funding options available for your development project.
The costs involved with mezzanine finance
Mezzanine finance lenders take on more risk than those offering development finance. This is because the loan is secured as a second charge and a higher loan-to-value (LTV) ratio is offered. As a result, the interest rate charged will be much higher than the rate payable for your main loan. Interest rates differ between mezzanine lenders and are worked out on a case-by-case basis. This is based on various factors:
- Your experience as a developer
- The amount of deposit you can pay
- The size of the loan you wish to borrow
- The development’s location
- The anticipated demand for the development when it’s finished
You can expect to be charged an interest rate starting from 12% per annum and possibly reaching as high as 30%. Rather than paying the interest monthly, it can be rolled up, which will help to maintain your cash flow. As well as the interest charged on the loan, an arrangement fee is payable. This usually starts at 1%. An exit fee may also be charged but this is also determined on a case-by-case basis.
The benefits of mezzanine financing
There are many advantages to using mezzanine finance:
- You have access to more funds for your development project on top of the main loan
- It reduces the need for you to pay as much capital into the project
- Your return on investment is higher
- You can maintain a healthier cash flow
- You may be able to invest in additional projects
- The interest payments may be tax deductible
- The repayment terms are flexible and can be tailored to meet your needs
The drawbacks of mezzanine financing
There are also disadvantages to consider before applying for mezzanine finance:
- It’s more expensive than other forms of funding and will have a higher cost than the senior loan
- The eligibility criteria are strict because of the risk involved for the lender
- You have to provide a personal guarantee
Although the mezzanine lender usually takes a percentage of the profit that your development project generates, this isn’t considered to be a disadvantage. Instead, this arrangement provides a higher return for the lender to counteract the risk they’re taking on. As a result, you gain the extra funding you need and benefit from the other advantages detailed above.
Alternatives to mezzanine finance
If you’re not sure whether or not mezzanine finance is right for you, there are alternatives to consider.
- Joint venture development finance: This funding option allows you to borrow 100% of the total cost of the development project. In return, the lender takes a high profit share, such as 40% or 50%. This is a good choice to consider if you don’t have any capital to invest or you’re an inexperienced developer who won’t be approved for mezzanine finance.
- Stretched senior development finance: Rather than securing development finance with a senior lender and then mezzanine finance with a junior lender, this type of funding allows you to borrow more from the main lender. This means you only have to deal with one lender and don’t need to worry about having two financing options running alongside each other.
Benefit from extra funding for your project with mezzanine finance
Get the top-up you need to begin your development project with mezzanine finance. Our mortgage brokers, located throughout Kent, London and Edinburgh, are available to discuss your loan requirements. They can check your eligibility and advise you of the alternatives available if they’re a better fit for your needs. Just give us a call on 01322 907 000 to benefit from a tailored funding solution for your project.
At Trinity Finance, we deal with specialist lenders for this niche type of loan. We handle each application on a case-by-case basis, approaching the lender that offers the best mezzanine finance interest rates and terms to meet your needs. For more information or to get the ball rolling with your application, get in touch with us on the number above. Alternatively, send an email to us at email@example.com or an enquiry via our contact form. One of our expert brokers will reply to you as quickly as possible to answer any queries you have about mezzanine finance.
A senior debt is a loan issued by a lender who has taken the first charge over your development project. This means that they are first in line to be repaid. A mezzanine lender takes the second charge, which means their loan is repaid after the senior lender has been repaid. As senior debts are less risky for lenders, they’re offered with more competitive rates than mezzanine loans.
The repayment options for a mezzanine loan are generally flexible. A tailored repayment plan can be made to suit your needs.
There’s a high level of risk for both you and the mezzanine lender. The lender takes a second charge over the development and is, therefore, second in line to be repaid after the senior lender. To cover their risk, the mezzanine lender charges a higher interest rate and usually takes a share of the profit. To benefit from mezzanine financing, you have to provide a personal guarantee to the lender. This means that you are personally liable to repay the debt.
Bridging loans have a much shorter term, which is usually up to 12 months. They are quick to arrange, providing you with fast access to the funds you need. This type of loan is secured against one or more properties or another type of asset. A bridging loan enables you to bridge the gap between your finances, allowing you to proceed with your residential or commercial project while arranging your next source of financing.
Mezzanine loans, on the other hand, can have longer terms and are used to top-up development finance loans. As such, they take a second charge and involve more risk for mezzanine lenders. To compensate for this, a higher interest rate is charged and a percentage of the profits generated from the development project is claimed by the mezzanine lender.