A mezzanine loan for real estate is the middle layer of capital that falls between the senior debt and the developers equity. The debt is secured (2nd ranking mortgage) and rates are higher than senior debt (1st ranking mortgage) as the loan carries a higher risk profile. This type of loan can assist developers greatly in managing their short-term cashflow between a current project finishing and new project commencing.
Mezzanine loans are generally offered only once the senior lender is in place and the mezzanine lender and senior lender are familiar with each other and agree to enter into an arrangement (Deed of Priority) between the two lenders. The mezzanine loan can be repaid either during or at the end of the project with the interest and principal repaid in a lump sum.
Mezzanine lending is generally ‘subordinated debt’ or ‘junior debt’. That means that the full senior debt (1st ranking mortgage) is repaid before the mezzanine lender. The debt however ranks ahead of the developers equity and is secured via a 2nd mortgage so repayment occurs after the 1st mortgage pay-out but prior to the developer receiving their profits.
As a result, mezzanine lending carries more risk for lenders than traditional senior debt finance, which means they will often charge higher interest rates and impose stricter borrowing conditions.
Also, mezzanine funding can be part of a larger finance package – developers may be able to get a certain amount of funding through traditional debt finance but have to use a mezzanine solution to get extra funding.
A mezzanine loan may come with higher interest rates and stricter borrowing conditions than other forms of finance, but it can also have big advantages for property developers:
A property development project backed by mezzanine financing will generally follow this timeline:
Mezzanine funding can be a very effective construction finance solution, but it also carries considerable risk.
It’s vital you get professional advice from an expert development finance broker, like CPC, who can:
To discuss your mezzanine financing options, book a free strategy session with David Lovato.
What are examples of mezzanine financing?
An example of mezzanine financing is when a developer needs additional funds to complete a project.
If a developer builds an apartment block and some of the units are unsold, the developer may need mezzanine finance to pay for marketing costs or finishing touches.
Mezzanine finance can also help a developer who had cost overruns gain additional financing so they can complete the build.
Why is it called mezzanine financing?
It’s called mezzanine financing because, like the mezzanine floors you see in buildings, it’s not a ‘full’ solution.
Just as a mezzanine floor is an intermediate floor between two full floors, mezzanine financing is funding that provides for extra facilities when the funds obtained from the primary loan are depleted or earmarked for other projects.
What are the advantages of mezzanine financing?
The main advantage of mezzanine financing is a developer gets the necessary funds to complete a project.
Mezzanine financing is especially helpful if there’s a timing difference between repaying the construction loan and selling the development or getting a mortgage.
What are the disadvantages of mezzanine financing?
Mezzanine financing has the disadvantage that it can be costlier than other financing arrangements.
Because the lenders have a subordinate debt they have more risk. To make up for this risk, lenders may charge higher interest rates.
What is the difference between mezzanine and equity financing?
Unlike equity financing, mezzanine financing does not give the lender a share of the project, its treated as a debt loan. With equity financing, the lender (or investor) always gets a share of the project profits.
Mezzanine finance can be like a construction loan where only the interest is paid until the project is finished, or like a mortgage where the developer must repay the capital and interest.
Crowd Property Capital Pty Ltd (CPC)
A registered company under the Corporations Act 2001, ACN 600 539 544
An accredited member of the Finance Brokers Association of Australia (FBAA) Member No M-352808
A licensed Corporation under the Property, Stock and Business Act 2002, Corporation License No. 10065109.
A member of the Real Estate Institute of NSW (REINSW)
David Lovato (Sole Director) holds a Certificate IV in Finance and Mortgage Broking and Property Services (Real Estate Agents License No 201 604 57 )