Mezzanine Loans
Mezzanine Finance for Property Development Mezzanine loans—often referred to as junior debt—are used to bridge the gap between a senior loan and a developer’s equity contribution. While the senior debt holds a first legal charge, the mezzanine facility is secured with a second legal charge, ranking behind the senior lender in terms of repayment priority and rights. Mezzanine finance typically enables developers to fund up to 90% of the total project cost, significantly reducing the equity required from the borrower. Because of its subordinated position and the higher leverage involved, mezzanine funding carries greater risk for the lender, and therefore, usually comes with a higher interest rate compared to senior debt. This type of structured finance is a powerful tool for experienced developers looking to maximise returns while minimising upfront capital outlay.
Mezzanine Finance Example
Development Finance Example
Project Overview
Gross Development Value (GDV): £5,000,000
Land Purchase: £1,500,000
Construction Cost: £2,000,000
Finance Cost: £500,000
Total Project Cost: £4,000,000
Senior Debt Facility – 75% Loan to Cost
A senior lender provides funding based on 75% of the total project cost:
Total Facility: £3,000,000 (75% of £4,000,000)
£2,000,000 – Construction Cost
£500,000 – Finance Cost
£500,000 – Contribution toward Land Purchase
To complete the land purchase of £1,500,000, the borrower must contribute £1,000,000 of equity alongside the £500,000 provided by the bank.
Mezzanine Finance – Up to 90% Loan to Cost
To further reduce the equity required, a mezzanine loan can be introduced:
Total Loan (Senior + Mezzanine): £3,600,000 (90% of £4,000,000)
Senior Loan: £3,000,000
Mezzanine Loan: £600,000
This structure allows the borrower to reduce their equity contribution from £1,000,000 to just £400,000, increasing capital efficiency while retaining control over the project.
Mezzanine Finance Example
Development Finance Example 2
Project Overview
Gross Development Value (GDV): £8,000,000
Land Purchase: £2,500,000
Construction Cost: £3,500,000
Professional & Finance Costs: £700,000
Total Project Cost: £6,700,000
Senior Debt Facility – 75% Loan to Cost
A senior lender agrees to fund up to 75% of the total cost:
Total Senior Loan Facility: £5,025,000 (75% of £6,700,000)
£3,500,000 – Construction Cost
£700,000 – Professional & Finance Costs
£825,000 – Toward Land Purchase
To complete the land acquisition of £2,500,000, the borrower must inject £1,675,000 of equity alongside the senior facility.
Mezzanine Finance – Up to 90% Loan to Cost
With mezzanine funding added to reduce the equity burden:
Total Facility: £6,030,000 (90% of £6,700,000)
Senior Loan: £5,025,000
Mezzanine Loan: £1,005,000
The borrower's equity requirement is reduced to £670,000, allowing for greater cash flow flexibility or allocation to other projects.
Summary
By combining senior debt and mezzanine finance, developers can leverage up to 90% of their total development cost. This structure is ideal for experienced developers seeking to scale quickly or preserve working capital.
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