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Why Use Mezzanine Development Finance?

Development finance is a flexible and cost-effective facility for funding large-scale property development and construction projects. But what happens when a first-charge development finance loan falls short of covering the full costs of the development?

This is a common issue that developers face, but one that can be addressed with mezzanine development finance. Whether you are facing an unexpected shortfall or simply looking to minimise your own capital investment, mezzanine finance provides the ideal solution.

Competitive Mezzanine Finance for Developers

Mezzanine finance, aka mezzanine funding, effectively enables developers to 'top up' their first-charge development finance facility.

By combining senior debt with mezzanine finance, it is often possible to cover up to 100% of the project's total costs. For example, a development finance loan of 80% LTV could be taken out to get the project off the ground, followed by a 20% LTV mezzanine finance facility to cover the remaining capital requirements.

Along with planned applications like these, mezzanine finance can also be a useful facility when faced with an unexpected financial shortfall at a critical juncture.

Our experienced development finance brokers can assist in securing stretched mezzanine, or super mezzanine development funding.

Simple and Straightforward Mezzanine Finance Applications

All mezzanine finance solutions are bespoke, tailored in accordance with the unique requirements and budgets of the applicant. Lenders consider each application by way of its individual merit, highlighting the importance of presenting the strongest possible case.

Our goal is to pair property developers from all backgrounds with competitive finance products from approved lenders, without the fuss. The relationships we have built with the UK's best mezzanine finance specialists enable us to negotiate unbeatable deals for every client we work with.

Types of Development Finance

When looking for development finance it is important to identify the type of project being planned by the developer in order to access the correct funding product. Types of works can include:

ground up build development finance

Ground up builds

New builds nearly always require development finance loans. Once the project is completed, developers may use development exit finance as a more cost effective solution, but this cannot be done before the project is watertight.

property conversion or restoration finance

Large scale restoration and property conversions

for this type of project refurbishment finance is typically the correct type of loan to use, however if the project is larger than the norm, development finance may be a better alternative.

property refurbishment finance

Property refurbishment

a refurbishment loan, which is a type of bridging finance, is generally used for property renovations. It can be used for various improvements including, installing a new roof, general structural changes, building an extension, refurbishment, and decoration.

bridging loan property development

Bridging loan for property development

Property investors or developers may want to buy property which needs development or completion work still doing and are unable to get funding from their bank. This is a typical scenario when a bridging loan is a suitable alternative.

How is Development Finance Repaid?

Development finance loans are typically paid in one of the following three ways:

Paid in full

the total loan amount is paid in full, using the profits, when the project is complete, and the properties have been sold.

refinance with long term loan

Refinancing using a long term loan

this usually happens when the developer wants to keep the development for either personal use or for rental purposes.

development exit finance

Refinancing using a Development Exit Bridging Finance

this type of short term loan is often used to fund a new development project before the current project is sold. It can also be used to give developers a bit of breathing space to complete minor works and find buyers.

Frequently Asked Questions

No, although mezzanine finance can be useful when faced with an unexpected financial shortfall. Mezzanine finance is typically taken out by a developer at an early stage, as a means by which to supplement (or top up) their primary first-charge debt. With mezzanine finance, the investor can minimise their investment of their own capital in the project.

However, mezzanine finance can also be taken out at a later stage, if and when a project's costs are likely to exceed initial projections. Mezzanine finance can therefore be used in a similar way to a bridging loan, though is most often taken out at an early stage of the project.

Interest rates, commissions and borrowing costs in general vary significantly from one provider to the next. However, full fees associated with mezzanine finance are usually payable in the form of a lump-sum exit fee, at the time the balance of the loan is repaid.

Some lenders charge a flat monthly rate of interest, while others charge commissions based on profits earned by the developer. Elsewhere, a mezzanine finance product may be charged on the basis of a percentage of the total value of the development.

It depends entirely on the nature of the project and the requirements of the developer at the time. However, bringing equity investors on board can lead to complications, conflicts and disruptions, given how they will almost always want some say in how the project is run.

For more information on the potential pros and cons of equity partners or to discuss any aspect of mezzanine development finance in more detail, contact a member of the team at UK Property Finance today.

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