Mezzanine financing for property development projects is advanced to a property developer to fund the gap between the first mortgagee facility limit and the property developer’s cash contribution to the project.
What is mezzanine finance explain with example
Mezzanine Finance will usually be secured by a 2nd Mortgage.
I have seen other definitions where they say Mezzanine Finance “gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full”. This is incorrect. A mezzanine lender may or may not include rights to takeover the project in the event of default although it is certainly not the definition of “Mezzanine Finance”.
Therefore “Mezzanine Finance” is subordinated debt which ranks behind 1st mortgage/senior debt and ranks before preferred equity and equity. The terms can vary from lender to lender.
First mortgagees will traditionally lend 50% to 80% of total property development hard costs.
If a property developer has a 20% equity in the project and applies for a first mortgage loan of 80% of total project hard costs, then the Bank only approves 70% of hard costs, the property developer will require an additional 10% in funding to top up debt and enable the project to proceed.
Prudential Finance will arrange Mezzanine Financing for property developers to top up over and above the first mortgage facility.
Prudential Finance has arranged in special circumstances 97% of project hard costs.
Up to 90% of hard costs
“Please note that the abovementioned information is indicative only”