Property Developers are often confronted with situations where a shortfall in immediately available funds frustrates their ambitions.
This is reflected by the gap between the Developer's own resources and that available from their main commercial mortgage lender. This shortfall can be fulfilled by Mezzanine Finance, where the aggregate of funds from all sources can equate to 100% of land acquisition and build costs.
Mezzanine finance can involve a percentage of the total equity, so that in addition to the lenders’ fees and interest, the lender also receives a share of the profit when the development is sold.
Property investors often use this type of funding as a second charge on their investment properties. They choose this type of finance when looking at below-market-value purchases, using the mezzanine finance to bridge the gap between the Buy to Let mortgage and purchase costs.
As a reflection of the higher risk to the lender of a second loan against a property, above average interest rates normally apply, starting from a few percentage points above the Base Rate.
In recognition of the fact that mezzanine finance is effectively a second charge, it is vital that a compelling case is presented to lenders and this will require the services of an experienced commercial mortgage broker.
Mezzanine finance can also be used to purchase businesses, especially with leveraged buy-outs and young businesses. The lender often assumes stock in the company and then exchanges this once business reaches a pre-agreed level. The debt can also be rolled-up to be repaid at the end of the term, avoiding negative impact on cash-flow.
Despite the current financial environment, we are still able to present attractive solutions by applying an innovative and refreshing approach , utilising our wealth of experience in this area.
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