Resurgence of Mezzanine Finance for Property Development!
Mezzanine finance is made up of two elements and is part-equity and part debt solution. It takes second priority in repayments after the senior debt, and takes a second charge over a property. Mezzanine finance is mainly used by borrowers with little liquid assets as it reduces the amount of equity investment that the project requires. Due to its higher risk, mezzanine finance tends to be more expensive, but lenders will usually take a careful and personal approach to understand the developers project to allow for a more flexible solution.
So why has it become so popular?
The revival of the use of Mezzanine Finance for property development came about due to the credit crunch and the fact that many of the previously well-known property lenders considerably scaled back on their leverage appetite. It is also said that since the recession, development lenders have not been able to offer particularly high leverage, which in turn has required more equity from developers and dragged down returns on equity.
Developers have turned to mezzanine lenders to plug the leverage gap that has been left since the crisis (albeit not fully as the combined LTC (loan to costs) available from senior and mezzanine lenders is still less than what was available from banks pre- recession. The majority of lenders seem to prefer to go with clearing banks to do the senior piece and mezzanine lenders to top up the leverage as the blended annual rate can be cheaper than a one stop solution provided by a stretch senior lender.
Will more lenders look to offer Mezzanine Finance?
Unlike the rapid increase of lenders in the senior debt, stretched senior debt and bridging lending spaces, mezzanine finance is still seen as somewhat specialised and the second charge market doesn’t quite have so many participants. That said, the prevalence of mezzanine development finance is very likely to increase as senior lenders move further up the risk ladder in order to meet their return requirements.
The mezzanine market isn’t a market for speculative projects, it is a specialist niche area, so a lenders knowledge of development, experience and track record are all absolutely vital.
If you would like to speak too us about the above then please feel free to contact the team at Yorkshire Development Finance today.