Mezzanine Finance

Mezzanine Finance 

Clifton private finance

We specialise in arranging mezzanine finance on residential or commercial property transactions in the UK

If you are looking to source additional finance on a residential or commercial property in the UK we can help.
We are independent and work with a range of UK lenders many of whom are specialist lenders that are not available on the high street. We pride ourselves on providing excellent service responsive to your needs.
Call us on 0203 900 4322 to discuss your requirements.

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Mezzanine Finance Service

What is Mezzanine Finance?

Traditionally, property developers use a combination of their personal capital and the finance available from banks or specialist lenders to fund their projects.  However, there are times when lenders do not provide the necessary funding required for property developers to complete their development.

Due to the reduction in senior lending in recent years it has become common place for there to be a shortfall between the budget and the total cost of development.  This has become a frequent problem for property developers.  As a result, in today's rapidly changing economic landscape, it is becoming more common to have structured financings consisting of various components. Developers are constantly looking for additional ways to fund their projects.

In the event that there is a shortfall in funding, mezzanine finance provides an option for property developers to source further finance to ‘plug’ the gap.

Mezzanine finance acts as a second charge behind the main lender for the development. By providing additional funding, it allows property developers the freedom to minimise the amount of personal capital tied up in a project.  This enables developers to invest in multiple development projects at the same time.

The majority of mezzanine finance providers will offer up to 20% of the gross development value. Therefore, the portion of funding is usually as follows :

  • Prime lender - 70% of the total cost
  • Mezzanine lender -  20% of the total cost
  • Developer -  10% of the total cost

Example : A developer wants to purchase a £1 million property but can only secure £700K from their bank . They do not wish to put £300K of their personal capital into the property, so they approach a mezzanine lender to provide a portion of the remaining price. The mezzanine lender agrees to provide £200k, allowing the developer to only invest £100k.

When is Mezzanine Finance Appropriate?

Mezzanine finance is used by property developers when there is a shortfall in funding. This is when the property developer does not have the sufficient funds to complete their project.

Mezzanine funding is usually required to be invested into the development on the first day of the project to contribute to the purchase. Therefore, it is advisable to contact a specialist property finance broker to source the best deal available.

Mezzanine funding can be used for a variety of different types of building projects and it is regularly used by property developers   :

  • To contribute to land purchase costs
  • As development costs for residential new builds or refurbishments
  • For the purchase or development of commercial property
  • Anywhere in the United Kingdom.

How Does Mezzanine Finance Differ From Other Loans?

Mezzanine financing differs from other types of loans because of the flexibility it affords the borrower.  Through mezzanine funding borrowers can secure the necessary funding and arrange a repayment plan that suits them.

Mezzanine loans are a popular source of finance :

  • Can be secured within 28 days
  • Enable developers to acquire the additional funding they need
  • Provide up to 20% of the gross development value
  • Repayment plans between 12 and 24 months
  • Interest can be rolled up to avoid monthly payments

It is important to note that mezzanine loans are provided when the lender can see a high chance of return. This is because mezzanine finance providers take on a certain amount of risk that other lenders do not.

As a result of the additional risk, mezzanine finance typically will have the one or both of the following :

  • Higher interest rates
  • A percentage of profits

Mezzanine development finance can include high interest rates or an agreement for profit sharing, but it is a valuable tool to free up developers’ capital.  Developers appreciate this, as the more capital available the more they can take advantage of investment opportunities, which ultimately creates more avenues for additional income.  

Who Can Secure Mezzanine Finance?

Although the majority of mezzanine finance borrowers are property developers, mezzanine loans are not available to all developers.  Mezzanine finance providers restrict their lending to experienced property developers with a strong portfolio of successful projects. This is to ensure that the probability of repayment is high.

As a result of this, mezzanine finance providers rarely offer mezzanine loans to new or inexperienced property developers. This is because it is too risky for a lender to provide additional finance to a developer that has no experience or track record of successful projects, as the probability of repayment is low. In the unlikely event that a mezzanine finance provider grants a mezzanine loan to an inexperienced developer, it is likely that the interest will be a lot higher than a standard mezzanine loan.

An alternative route to source finance for new or inexperienced property developers is through a specialist broker to arrange a joint venture. This is where an experienced property developer or high net worth earner invests in the inexperienced property developer’s project. 

How Can I Get Mezzanine Finance?

Arranging mezzanine finance without professional assistance can be a long and drawn out process, with no guarantee of success. This is because almost all mezzanine finance providers solely deal with professional finance brokers in the financial service industry. When developing a property, organising adequate finance can be lengthy and complex. In the event that mezzanine finance is required, it is advisable to contact a specialist property finance broker to ensure that the mezzanine loan is appropriate, with fair terms and at the best available rates.

Call us today on 0203 900 3040 or complete our callback request form
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