It is only a matter of time when the property cycle peaks, plateaus and then falls and development site values start to crack.
Larry Schlesinger, Australian Financial Review writes:
“Metropolitan development sites values, which have surged in recent years on a wave of Chinese money, are showing the first signs of correcting after developer Nicholas Smedley secured two sites at discounts of 30 per cent or more after vendors rejected his original off-market offers, thinking they would get more through a public campaign.
Chinese buyers have quit the market in droves, and off-the-plan sales rates have slowed drastically in Sydney and Melbourne meaning the building boom is starting to wane.”
Lately I have heard some very interesting definitions of what “Mezzanine Finance” means.
To clear up the actual meaning; “Mezzanine Finance” is subordinated debt with ranks behind a 1st mortgage/senior debt.
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.