What Is Mezzanine Finance?
Property developers have historically funded projects by combining personal capital with loans from specialist lenders and banks. However, challenges like rising interest rates and high loan-to-cost ratios can see developers struggle to finance significant development projects. As a result, they’re increasingly turning to mezzanine finance for an additional boost.
Mezzanine finance enables investors to bridge the gap between their own capital and the loan provided by lenders and banks. It acts as a secondary funding source or secondary charge, allowing developers to minimise the amount of capital tied up in a project and continue investing in other projects.
Also known as sub-debt, mezzanine funding enables businesses to finance complex funding scenarios, such as large development projects, by using their equity as security. Therefore, if a company can’t repay a loan, the lender takes a share of its equity as repayment.
Mezzanine finance is typically used when perceived risk prevents a borrower from raising enough money through traditional loans. It enables organisations to borrow larger amounts and, if the loan goes to plan, make greater profits to pay for it and raise funds for additional projects.
How Mezzanine Finance Works
Mezzanine finance bridges the gap between debt and equity. Therefore, if an individual can’t repay a debt, the lender takes a share of the equity as repayment. A mezzanine loan often comes with higher interest rates than most other forms of debt, which is balanced by lower overall capital.
Lenders will usually agree to provide a loan of between 65% and 75% of a development project’s total cost. A mezzanine loan will typically bring this loan figure up to anywhere between 70% and 80%, with the property developer covering the remainder of the total cost.
- Mezzanine loans carry higher yields than other forms of debt and often have unsecured debts.
- Mezzanine finance tends to be more risky for lenders, so any agreed finance is likely to have higher interest rates and a higher loan-to-value (LTV) ratio.
- Interest rates will vary and be determined by factors like deposit input, market demand and the amount of finance required, but typically start at around 12% per annum.
- Mezzanine loans can be structured through partially fixed and variable interest rates.
What Is Mezzanine Finance Used For?
Property developers turn to mezzanine finance when they lack funding or capital to complete a project. Bridging the gap between capital and property development finance provided by a lender enables developers to maximise their return on investment while minimising their upfront deposit. It can also fill deposit gaps or reserve funds for future investments.
Mezzanine financing will usually be invested at the start of growth projects or to contribute to investments like:
- Land purchase cost contributions
- Development costs for new build homes and refurbishments
- Development of commercial property
- Property coverage
Mezzanine Finance Benefits
Mezzanine finance provides flexibility that property developers may struggle to gain through other forms of funding. The benefits of mezzanine financing include:
- Quick Finance: Property developers can secure mezzanine funding within 28 days, which helps to avoid costly project delays.
- Tax Deductible: The interest paid on mezzanine finance is tax-deductible, allowing investors to reduce the total cost of their debt.
- Payment Options: Mezzanine finance enables borrowers to secure the required funding and arrange a repayment plan that suits their portfolio needs. They can move interest to the total balance of the loan and roll interest up to avoid monthly payments.
- Loan Restructuring: Rapidly growing companies can opt to restructure mezzanine finance into another loan with lower interest rates. As a result, the mezzanine loan is used as temporary capital until the borrower secures traditional funding.
Mezzanine Finance Challenges
In addition to these benefits, mezzanine finance can present borrowers with challenges like:
- Loss of Control: Mezzanine finance borrowers can sacrifice control due to losing equity, while lenders can demand board presence in the borrower’s organisation.
- Higher Interest: Mezzanine finance often has higher interest rates and restrictive terms. This can limit an investor’s ability to borrow additional funds and restrict the bonuses and payments organisations make to employees.
Secure Mezzanine Funding With Hectocorn
Mezzanine funding tends to be complicated, so it’s provided by specialist lenders that tolerate high levels of risk. These lenders will require businesses to service high debt levels and are likely to be open to bespoke transactions.
However, many investors struggle to find lenders that will provide the mezzanine finance terms that meet their requirements. Therefore, securing a mezzanine finance agreement that matches your needs requires working with a broker that has established relationships with these specialist lenders.
Hectocorn’s extensive network of lenders includes niche providers with experience in mezzanine finance. These relationships enable us to structure financial packages that best suit your project requirements and financial flexibility you can’t gain through high-street lenders. Our team of brokers can secure specialist products, bespoke structures and timescales and competitive equity for ultra-high-net-worth individuals and companies.
Discover how Hectocorn can help you secure bespoke mezzanine finance solutions by getting in touch.
Frequently Asked Questions
Mezzanine finance is a secondary funding source that bridges the gap between a developer’s equity and bank loans. It enables property developers to fund projects without tying up excessive capital.
Mezzanine finance provides a loan secured by the developer’s equity. Lenders often provide 70–80% of the project cost, with higher interest rates reflecting the higher risk.
It is used for land purchases, new build developments, refurbishments, commercial property projects, and covering property development costs.
Benefits include quick funding (often within 28 days), tax-deductible interest, flexible repayment options, and the ability to restructure loans as projects grow.
Borrowers may face higher interest rates, restrictive terms, and potential loss of control if lenders take an equity stake or demand board presence.
Hectocorn has access to specialist lenders experienced in mezzanine finance. We structure bespoke funding packages tailored to property developers’ needs, offering flexibility and competitive terms for UHNWIs and companies.