Mezzanine Debt is the name given highly leveraged Development Finance where the lender has a 2nd legal charge over the asset.
Residential, Student, Commercial.
Mezzanine Debt is available typically up to 90% of total project costs (LTC) with a maximum cap of 75% of Gross Development Value (GDV) for Residential projects (Student and Commercial will vary).
Lenders will earn a return on their funds by applying a variety of charging structures to include:
- Interest: normally charged on the drawn balance (occasionally on the total offered facility), calculated daily and compounded monthly or it may be a flat rate which is not compounded.
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- Lending fee in: calculated as a percentage of the offered facility or a fixed sum, either payable in whole, or part thereof, on acceptance of the offered facility or drawdown of the first tranche of funds.
- Lending fee out: charged on the repayment of the facility calculated as either a percentage of the facility, a percentage of the GDV of the project.
- Mezzanine Debt interest rates on prime Residential projects (experienced developers with a good financial covenant and a well located and viable project) typically range from 15-20% PA, plus completion and exit fees. Where the project is deemed to carry greater risk to a lender (experience/financial covenant/project viability), pricing will be higher.
- Student and Commercial projects will be priced on relevant market risk factors.
New Build, Conversion and Heavy Refurbishment projects.
England, Wales, Scotland, Northern Ireland (limited availability), Republic of Ireland (limited availability in an emerging market for some UK based lenders).
Full Planning Consent must be in place or consent under Permitted Development Rights (PDR). If the asset is to be acquired with Outline Planning Consent, a Bridging Loan will be required to purchase the asset pending the granting of Full Consent (in exceptional cases where reserved matters are minimal it may be possible to secure Development Funding at the Outline stage); and where possible a lender should be sought that offers both Bridging and Development Funding to avoid having to re finance.
- Sole traders, partnerships, LLP’s, Ltd Co’s and offshore vehicles.
- When the vehicle is to be a Ltd Co, lenders will often prefer it to be a Special Purpose Vehicle, or SPV, set up for the specific project and owning only the project asset.
- Where the borrower is to be an offshore vehicle full disclosure and audit of the directors and beneficial owners is required.
- 2nd Legal Charge.
- 2nd Debenture (incorporated borrowers).
- Personal or Corporate Guarantees (incorporated borrowers - as a norm; lowly leveraged projects where the borrower has a strong financial covenant may be an exception). The amount any type of Guarantees vary from full debt to a percentage of build costs and interest, depending upon the lender’s policy.
- Collateral Warranties from the design team.
- Assignment of JCT build contract (where a third party contractor is appointed).
At Optima we broker Mezzanine Debt funding from £250k to £15M.