Mezzanine Finance
The term mezzanine finance is now used to cover many forms of finance over and above the level of funding provided by traditional debt facilities.
It differs from equity finance, which is true risk money/investment capital, in that mezzanine finance is usually secured by means of a second charge over the assets being financed and attracts a higher rate of interest than debt, but without necessarily being linked directly to a profit share arrangement.
Given the nature of mezzanine finance, the terms and rates charged vary enormously depending upon the usual factors of strength/experience of borrower, risk profile of project and level of profitability/return generated by the scheme.
Typically, terms for mezzanine finance in the current market can be summarised as follows:
Typical Example:
| Type of clients: |
Strong experience/track record in property development |
| Project type: |
Residential/commercial/mixed-use property development |
| Project size : |
Completed value of £1m to £10m |
| Arrangement fee: |
1% of funds provided |
| Total interest rate: |
30% to 35% per annum, rolled up and paid on completion of schemes. This return can be expressed as:
- A fixed fee
- A percentage of GDV
- A simple rate of return on funds provided
|
| Security: |
- Second charge over asset
- Agreed form of deed of priority with lender
- (Limited guarantees are also often required from the principals of company)
|
| Other costs: |
Valuation and legal fees (the mezzanine funder will normally accept the same valuation as that prepared for the debt provider) |
| Arrangement fee: |
1% of total facility, charged at time of drawdown |
The key benefit of mezzanine finance is that it reduces the equity needed to be invested in a scheme by the developer and thus enhances the return on capital employed. In addition, the reduced investment in one project allows the developer to undertake a greater number of schemes than would otherwise be possible.
Where we arrange mezzanine funding for clients, we normally arrange the debt facility that is needed as well, as it is critical that the two lenders are able to sit alongside each other and provide the total funding needed by the client without undue complication.
It is for this reason that we normally use partnerships of debt and mezzanine funders that we have already proven as successful with pre-agreed forms of documentation, deeds of priority, etc. and similar view points on projects.
As well as having separate mezzanine funders, we also work with a number of merchant banks who are able to provide the complete package from one source. The cost of such combined facilities remains similar with the element of the loan considered as debt being charged at one rate, with the remaining funds charged at a higher rate and/or exit fee.
In general terms, the combined single sources are more suited to higher value schemes while the combining of two lenders is best suited to smaller schemes.
With details of a proposed scheme and summary financial analysis, we are able to advise as to likely terms that can be structured on that specific scheme.