For developers who have secured their senior project funding and are seeking to reduce their equity or need some top-up financing to lock in the capital they need to get their development over the finish line, mezzanine financing may be the ideal solution.
Mezzanine financing is an alternative form of financing often used in tandem with senior financing and the sponsors’ equity. While senior debt financing involves borrowing money from a lender and paying it back with interest at a later date, equity financing involves selling a piece of equity in return for capital. Mezzanine financing, meanwhile, is registered in second position behind the senior debt and bridges the gap between your senior debt financing and capital provided through equity (either your own or from an investor).
For example, your lender may be able to lend 70% of the cost of a project and you may only want to put 10% of your own equity in, which leaves 20% to be funded. This remaining 20% can be provided through mezzanine financing.
There are several advantages that come with mezzanine financing:
- Mezzanine financing reduces the amount of equity a developer needs to put into a project, which can allow you to commit to more projects simultaneously
- It may help reduce the need for equity financing, enabling you to keep full control of your project
- A mezzanine financing facility replaces cash equity and their return on equity is potentially higher
- Mezzanine finance terms are generally more flexible as they are designed to help ensure you have enough funding to complete the development. Often, repayment terms can be customized to suit your unique needs
Other things to know about mezzanine financing
Because mezzanine financing is subordinated behind the senior debt when it comes to repayment, it carries more risk for lenders. As such, there are a few things to keep in mind should you consider applying for mezzanine financing.
- Interest rates are typically higher, given the higher risk the lender takes on. The rate will vary according to the risk assessment of the individual project
- Mezzanine financing typically funds first and is repaid last. As such, project construction delays, sales slow downs or interest rate increases can have a significant negative impact on the development
MCAP offers a range of financing options to support development initiatives. And, with a depth of experience in the market, our Development Finance Group can create solutions that meet the unique and varied needs of our clients.
Contact our Development Finance Group for your next development project.
