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What is Mezzanine Finance?

What is Mezzanine Finance?

You may have heard of mezzanine finance, but what is it and how does it vary from a standard mortgage transaction?

 In essence, mezzanine financing is an additional band of borrowing that can be made available to property developers to assist with the up-front and on-going cost of property development schemes. By obtaining additional borrowing the developer may not have to commit so much of their own funds to a project at the start of a new project. This type of funding arrangement generally permits a higher overall loan to value ratio than with a sole primary lender. In return, the lender is likely to command a higher interest rate, or increased repayment fees to compensate for the increase risk of providing mezzanine funding.

 A mezzanine facility can secure funding for specific elements of a development, such as land acquisition or development or provide more general funding for the development overall.

 The funder providing a mezzanine facility will typically require that their loan is secured by a second charge over the property or development site against which the monies have been lent. It is not unusual for the lender to require further ancillary security ranging from a Director’s Guarantee to Collateral Warranties and Copyright Licences to secure their position.

The procedure for finalising the legal charge is much the same as for a mortgage from a primary lender, requiring comprehensive property due diligence to be undertaken, and review of the transactional documents. As standard, a mezzanine finance provider will generally have a set of specific requirements to be satisfied before the charge can be entered into, including the provisions of a clear and marketable title to the property, necessary search results, details of planning obtained for the development and replies to enquiries provided by the property owner (or seller, in the case of a charge being entered into on completion of a site acquisition).

 The legal charge will sit behind the charge in favour of the primary (or senior) lender and to deal with the priorities attributable to the lenders and the borrower typically an inter-creditor deed will be required. This governs the relationship between the lenders involved and makes arrangements for the order of repayment, and what would happen in the instance that the loan (or loans) are called in by either lender.

 We have a wealth of experience in acting for both lenders and borrowers in relation to mezzanine financing arrangements, and the development team is well versed in what is required in secured lending transactions. As we act for both lenders and borrowers we are strategically placed to provide expert advice on the intricacies of development sites, being attuned to the potential difficulties such transactions can present, and workable solutions that are acceptable to lenders and borrowers alike.

 Should you want assistance with a mezzanine finance transaction, secured lending or any other land or property transaction please do not hesitate to contact our Real Estate department who will be happy to help. Either visit https://herrington-carmichael.com/contact/, email your query to realestate@herrington-carmichael.com or call 01276 686222.

This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

Authors

Tim-Hardesty-PNG
Tim Hardesty
Partner
01276 854 905
tim.hardesty@hc.law

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