Mezzanine Finance is usually provided as part of a finance solution in situations where a borrower does not have sufficient cash to fund the deposit required by the senior lender. The loan ranks behind the senior lender and secured by means of a second charge over the asset.
Rates are higher than first charge lending to reflect the higher level of risk to the lender. However in certain situations mezzanine can be a useful tool for Property Developers as it substantially reduces the sum of equity required enabling an otherwise doomed project to proceed.
Successful developers sometimes use mezzanine to fund an unexpected additional project which has arisen. Their cash maybe tied up in another project and in normal situations would be forced decline what is a very attractive opportunity.
Mezzanine debt works best for higher margin projects and is generally available to experienced developers building in a desirable location, perhaps with some pre-sales agreed or with other assets that can be sold should the project be delayed.
The advantage is that multiple projects can be undertaken with the developer retaining all the profit unlike Joint Venture agreements where they should expect to give up at least 50% of the profits.
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