WHAT THIS PRODUCT IS
Mezzanine loans provide a layer of debt funding to fill the gap between the senior debt, which would typically be provided by a bank, and the equity investment.
They are generally used by property developers who need additional capital for a project but do not want to give away equity. Instead, they are happy to postpone their return in the funding structure behind the mezzanine debt and pay a fixed return to the lender.
HOW THIS PRODUCT WORKS
Our Mezzanine Loan products are secured by a second charge on a given property. A charge is the means by which lenders enforce their rights to property. Its seniority determines the order in which lenders make a call to recover their funds in the event that the borrower defaults on repayments. Mezzanine loans rank in priority above the equity in a project but behind the bank and deliver a fixed return for investors.
A mezzanine facility allows for increased leverage on a property by adding a second layer of debt on top of the Senior Loan. This could take the total leverage on a project up to 80%, or even 90% which is significantly higher than the 60% to 75% currently being offered by senior lenders.
By using Mezzanine debt, developers can attain a higher return on their projects because it is cheaper than bringing in equity partners into the deal.
The return offered on a mezzanine loan will be reflective of the total amount of debt on a project and can be between 14% to 16% per annum.
RISK AND REWARD PROFILE
Given that mezzanine loans rank behind the senior loan, in the event of a default the mezzanine holder may not get back all of this capital and the risk of capital loss is higher than with a senior facility. This is reflected by a higher rate of return for investors – typically between 14% to 16% per annum.
This would suit an investor who is happy to take more risk than the Bridge product carries and prefers a fixed return, but who does not want to make an equity investment.