Mezzanine funding is used to fill the gap between a developer’s equity and the senior debt provided by a bank. Typically, the developer will put up about 10% of the cost, the bank between 60-80% and the mezzanine lender the balance.
The mezzanine security will rank behind the bank’s. Most mezzanine lenders will be paid interest on the loan plus a redemption fee. This redemption fee forms the bulk of the cost of mezzanine funding and, as such, many developers see it as a charge on profits rather than an additional expense.
Here are the top five things a developer should do when applying for mezzanine finance:
1. Make a proper plan
Let’s be clear about this, a list of figures haphazardly entered on to a spreadsheet is not a proper plan. Don’t expect the lender to try to work out why the development stacks up. Comprehensive numbers showing how you have arrived at the gross development value (GDV), the gross development cost (GDC) and the cost of finance will give you the best chance of getting your loan.
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2. Be realistic about sales prices
Tempting as it may be, don’t pluck sales prices out of the air based on nothing more than wishful thinking. Be realistic about sales figures and back them up with empirical evidence.
3. Explain the project in writing
Buyers may be impressed by glossy sales brochures, but that doesn’t go far enough for a lender. Tell us why you have bought or are buying this property, in this location and for this price. Explain your thinking behind the scheme, what your target market is and what the key selling points are. Support it with data and facts.
4. Tell us about yourself and your track record
We are interested not just in this development, but the people behind it. Who are you, who’s on your team and what have you done before? Give us as much information as possible and don’t sugar coat it. You need to be able to explain to us the reasons behind your less successful schemes as well as impress us with the ones that went well. If you can support what you’ve told us by recommendations and testimonials, all the better.
5. Be transparent about your senior debt
If the legals, putting in place the security and the release of the funds is to go smoothly, there needs to be a relationship of trust between the lenders and their respective professionals. This starts with you being transparent with both the senior lender and us and providing identical information to each.