What is Mezzanine Finance

Mezzanine finance is the funding that makes up the difference between the level of bank funding and the actual project cost.  Mezzanine deals can sometimes enable a property developer to take on a project which they might otherwise not be able to finance.

In a mezzanine scenario the bank loan is often referred to as the senior debt.  The mezzanine funder then supplies funding to “top-up” the senior debt to the required level.  The top up portion of the finance is generally going to be charged at quite high rates.  Some of the things to look out for when dealing with a potential lender:

  • Willingness to lend up to 100% of the project costs
  • Roll-up of interest.
  • Ability to work closely with the senior creditor and other professional advisers.

In the context of property development finance it would be unusual for a mezzanine deal to be arranged if the developer is lacking in experience or has a poor track record.  You might expect the mezzanine funder to dig quite deeply into the viability of the project and the legal fees alone can be expensive.

One of the main attractions of mezzanine funding is the ability to pay the debt off quickly if surplus funds become available.  This means that the developer is only paying for the most expensive finance for the shortest time.

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