Mezzanine financing for UK real estate
Mezzanine funding is highly popular for UK real estate, even for developers which are highly capitalised. This flexible funding arrangement gives developers access to greater funding facilities that they might otherwise have access too, helping them to push projects over the line when they might otherwise stall and meeting the challenges of unexpected or higher costs which come from the nature of such developments.
Why use mezzanine funding?
Mezzanine debt can be used to plug the funding gap between your business or development equity and a senior debt arrangement offered by a bank. Developers use it even when they have the cash to finance their projects. This is because mezzanine finance offers various benefits. It increases the Internal Rate of Return (IRR) on a project, is quick and easy to organise and offers control. Furthermore, it is largely calculated as a cost against profits, and paid as an exit fee when the loan is redeemed (rather than becoming a further working capital requirement.)
Who should use Mezzanine finance?
Mezzanine funders extend this type of finance to meet a range of situations, including:
- Property developers seeking to get larger projects off the ground
- Businesses looking to meet ambitious growth plans
- Businesses looking to fund management buyouts or acquisitions
Mezzanine finance rates and examples
Mezzanine finance providers UK wide will have very different terms, but the interest rate charged against the loan portion of these deals can be anywhere from around 10% to 30%, or even more depending on the lender and the applicant’s situation and risk profile. Mezzanine funding interest tends to be charged monthly, in line with bridging finance arrangements, so a monthly interest charge of 2.5% isn’t unusual.