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Mezzanine Finance

Mezzanine Finance is 'top up' finance.

In theory, you could raise up to 100% of total costs using mezzanine finance. But those days are gone; the world has changed. In practice, you'll be doing well to get up to 90% of total costs; and not many schemes or borrowers will qualify.

Mezzanine finance is used in residential development finance when the borrower has little or no equity to put into the deal. We get a lot of enquiries about this because developers are often short of cash. It's an experts market where our advice and experience will help you save time and fees.

Only the best will qualify

Mezzanine finance allows an experienced developer the opportunity to undertake a deal he might otherwise not be able to do. But lenders are very choosy. They cherry pick only the best deals to back.

Structures vary, so the help of an expert broker such as Monyy is crucial if, as borrower, long-term profit matters to you. We usually set up the senior debt portion first; say 65% LTC and then search for a mezzanine lender to provide the 25% LTC top up, leaving you to provide the 10% cash/equity gap. Often, the senior debt provider and mezzanine lender will be the same institution, giving them greater control over the risk.

Mezzanine finance is relatively expensive, because the provider is sharing the development and market risks with the promoter. Profit share, interest roll up, arrangement and exit fees are all variables that need to be negotiated.

We can help when lenders won't

Don't worry if your proposal falls down and cannot attract a mezzanine lender - we may still be able to help. We'll put your proposal on our Opportunities and Deals notice board and hope to attract the missing ingredient required to unlock the senior debt necessary to make your deal fly.

Why not take a look? Click here.

Mezzanine Security

Some lenders who provide the senior debt proportion don't like mezzanine funding because the terms of their lending prohibit allowing a second charge on the property they hold a first charge over. But the great benefit of mezzanine finance is that it can also be set up to avoid the need for a second charge. In cases where a second charge is being resisted by the senior debt provider, the mezzanine finance proportion can be secured against the shares of the borrower instead - usually an 'off-the-shelf' SPV which contains the property subject to the loan.

This way if mezzanine finance is in default, the lender essentially takes majority ownership on the holding entity, and therefore also controls the property. It can then proceed, for example, to sell the property. The senior debt must still be serviced and paid off if the property is sold, but this mezzanine funding arrangement gives the lender more flexibility in negative circumstances than it would have with a conventional subordinate loan. If a conventional subordinate loan is in default, the lender cannot take ownership of the property through foreclosure, since the claim against title represented by the senior debt would have to be satisfied before the subordinate lender could take action.

Mezzanine Commercial

Whereas it's possible to get 90% residential development finance, it's not possible to achieve 90% for commercial development, because it's far riskier.

Commercial property from a lender's perspective is considered an investment, not a basic need, such as a roof over your head. Because investment property is "secondary" to a borrower's personal residence, it is usually considered a higher risk loan.

If things go wrong in a borrower's personal life and money becomes tight, lender's conventional wisdom says that the borrower will shift his resources to protect his personal residence ahead of his commercial investments

There are no 90% LTV commercial loans available!

Commercial property is for serious investors with equity to risk, a positive net worth, and an asset that a lender would feel comfortable encumbering.

Mezzanine finance is secured by an assignment of the ownership interest of the borrower. In the even of default, the lender forecloses on the ownership of the borrower and becomes the borrower. An inter-creditor and subordination agreement with the senior lender is necessary.