Mezzanine Finance Loans
What is Mezzanine Finance?
Mezzanine finance is a type of senior loan, which allows businesses to borrow large sums of money using both debt and equity. This means that the borrower is paying a monthly interest rate like they would for a typical loan, but is also giving up a small stake in the project or opportunity to the lender because of the higher risks involved.
Mezzanine finance can help property developers or business opportunists to top up to as much as 90% LTV, helping them to access additional capital and drawdown more than a typical bridging loan which may only go up to 70% or 75% LTV.
It is often used for property development projects including new builds, large scale restorations and conversions and building large residential and commercial developments. However, mezzanine lenders can assist with business expansion.
How Does Mezzanine Finance Work?
Mezzanine finance is an addition to an existing bridging loan or form of debt and might either be used to accelerate deals and development by bringing more cash to the table or can be used to top up an existing senior debt.
Mezzanine finance loans are typically used for up to 24 months with a view that the loan is paid back in full upon exit.
This type of finance is structured as subordinated debt, which means that the loan is in fact unsecured and is not secured against the property or any other assets.
In terms of the repayment priority and where it sits, mezzanine loans are actually a lower priority than senior loans (such as senior stretch loans or bridging loans) and if unpaid or the deal goes under, the lender may not be able to recover their investment.
Therefore, the mezzanine finance lender receives some equity in the deal, development or opportunity and by taking on this risk, they are hoping for a bigger upside if it goes to plan.
Is Mezzanine Finance Right For Me?
Mezzanine finance can provide useful capital for riskier deals that might be in need of important funds. There are other benefits such as the speed of funds, tax deductibility and flexibility in repayment terms.
This can be advantageous, but it is important to know that the interest rates for mezzanine loans are higher than traditional debt financing and you will be required to give up equity.
How Much Equity Must I Put In To Be Eligible For Mezzanine Finance?
The equity you give up can range from 5% to 20% depending on the project and loan terms.
How is Mezzanine Finance Different To Senior Stretch Loans?
Senior debt is the company’s first tier of liabilities and it is secured against a property being used in the development e.g a bridging loan, mortgage or original investment.
If the project or business goes under and is a write-off, the senior debt (possibly to the bank) would be the first to be paid.
Mezzanine finance would be the second form of debt, which is why it is also known as junior debt.
Is Mezzanine Finance High-Risk?
Mezzanine finance is associated with higher-risk for both the borrower and lender only because the borrower is having to give up equity. For the lender, they understand there is a bigger return if the deal is successful, but they may not be able to recover their loan if the project does not go as planned.
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Is Mezzanine Finance Drawn Down Immediately?
Depending on the case, mezzanine finance can be paid in tranches or in one go, which may suit the progress and status of the development or building.
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How Do Repayments Work For Mezzanine Finance?
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