Mezzanine loans 101

What is a Mezzanine Loan?

One of the key questions posed in property development is: “Exactly what is mezzanine finance?”

To most in the industry, it’s clear – many a deal can only be completed thanks to the existence of mezzanine arrangements, but to those on the outside – or new entrants – it could be misconstrued as a complicated instrument.

But It really is not.

Simply put, mezzanine loans are a financing option that allows developers to spread financial exposure whilst doubling the return on available capital, and at the same time, increasing property development capacity.

This form of funding allows developers to work on multiple projects at one time. Whilst completing one development they can move onto the next. This is a great advantage, particularly in a time when the need to act quickly to secure a deal is essential.

The Pint of Guinness Analogy

A helpful analogy runs like this: Think of a pint of Guinness. Three-quarters of the pint is the ‘black stuff’, the final quarter, white foam.

Now think about a pint of Guinness that is only half full, meaning that the top of the white foam only reaches ¾ of the way up the glass.

The main body of the drink is the loan you have received from the bank to fund it but you need to reach the top of the pint glass to fund the project. To lessen the space between the black liquid and the top, you can use a mezzanine loan- the white foam – which reduces the amount of additional equity needed to reach the top.

Mezzanine loans help fill the gap, allowing developers to get projects off the ground, or to finish existing projects whilst moving on to the next.

This form of loan is of great advantage today, more than ever before. Commercial lenders are now limiting the loan to value ratio to no more than 60%-65%, as opposed to the 75% to 80% that had previously been the norm.

Reditum Capital can provide Mezzanine loans up to 70% of GDV or 90% of costs, whichever be the lower.

What is the cost?

Again, to debunk any mystery, it needs to be made clear that mezzanine is typically more expensive than traditional debt from a bank. This is because it sits behind the senior debt on a second charge and is, therefore, higher up the risk curve.

Whilst it may seem a high price to pay, it is far cheaper than equity and allows you to retain 100% of the profits within a transaction. This would not be the case if you borrowed from a PE Fund or from HNWI’s and this is why there is a growing appetite within the market for mezzanine finance.

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Reditum Capital specialises in mezzanine and bridging loans in the UK, Europe and worldwide. Get in touch to hear how we can help you with your residential and commercial development projects.




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