Mezzanine Finance
What is Mezzanine Finance?
- Mezzanine finance is used to plug the gap when your equity contribution to a development project plus the development finance (also known as senior debt) is not enough to cover the whole project costs.
- A typical development finance lender will cover between 70% and 80% of the total project costs and will require the developer to fund the difference.
- Mezzanine Finance can lend additional funds up to 90% of project costs meaning that you only need to put in a 10% equity contribution.
- Mezzanine finance would typically be secured by way of a 2 nd charge on the site, whereas the development finance would have a first charge – hence the term senior debt
- Like development finance, repayment comes from the sale or refinance of the completed development.
- Mezzanine lenders tend to be family offices, HNW individuals and Private Equity
It’s the ideal solution for experienced developers who want to increase their return on their own capital
Key Benefits
- Maximised Capital Efficiency: Minimise personal capital use to take on larger or multiple projects and boost returns.
- Ideal for Large Projects: Suited for complex developments requiring significant funding.
- Retain 100% ownership: Mezzanine finance is a loan, not an equity investment, so allows you to retain full control of the projects.
- No additional valuations: Mezzanine lenders generally accept the valuations and independent surveyors’ reports commissioned by the development finance lender.
- Capital Raising: Unlock equity in owned property or land and secure funding for development costs, improving cash flow and reinvestment potential.
Who is Eligible?
Being an experienced developer is an absolute must, but Limited Companies, PLCs, Sole Traders, Private Individuals, SIPPS and Partnerships are all able to use mezzanine finance.Lenders will look at several factors when assessing suitability and price including:
- The developer’s level of experience
- Has the senior debt/development finance already been approved – if you can’t get senior debt, you would be unlikely to get mezzanine funding
- The profitability of the scheme to make sure the developer remains committed to the deal
- The value of the site and the value of the finished project or Gross Developed Value (GDV)
- Your probability of repaying the loan via either a successful sale or refinance of the property
- Your site must already have planning permission
How much can you borrow?
- Loan-to-value (LTV) is typically up to 90% of the project costs, after the development finance has been accounted for
- Loan amounts starting from £100,000 to £10M+.
- Established firms in any sector – including construction, logistics, agriculture, manufacturing, and professional services
Interest Rates & Terms
- Mezzanine interest rates typically start at the level where the senior debt ends. Expect to pay upwards of 12%
- Loan terms are typically 12– 36 months and in line with the development finance
- Security is usually a 2 nd charge on the property/land being developed
- Normally you would need your senior debt in place first, with a reputable well-funded
lender.
