27th February 2024
Development Finance for First Time Developers
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Mezzanine Financing
Welcome to Mortgage Lane, your go-to source for mezzanine development finance. Our acclaimed team of brokers, enriched with a wealth of property investment expertise, is focused on delivering custom financial solutions for your development projects. Serving both experienced developers and newcomers to the field, including those with specialised credit challenges, we are devoted to providing expert advice throughout every phase of your project. Count on us to skilfully guide you through the nuances of mezzanine finance, ensuring a smooth and confident journey in your development endeavours.
PROCESS BREAKDOWN
1
Information gathering and advice
The first process in your mezzanine development finance application will be gathering or updating information in relation to the property, land, or yourself. Once this has been established your expert development finance broker will make a product recommendation.
2
Credit approval
Once you are satisfied with the product recommended and have confirmed to proceed, this will usually be submitted the same day to give you a decision, Once the lender has approved the deal, we can instruct the surveyor and quantity surveyor, or asset manager.
3
Underwrite, valuation and QS sign off
Once the application is submitted, your valuation will be booked in and most of the time (depending on the lender). This will usually completed once your initial underwriting has been completed. Once the valuation is returned as well as the Quantity Surveyors (QS) report, if acceptable, the lender would then look to make a formal offer. You can then move to legal stage.
4
- Offer and completion
Once you have had your mezzanine development finance offer, you will require adequate legal advice and then once you’re happy, your solicitor can draw this down once the legal requirements are satisfied. Your broker at Mortgage Lane will always be checking in on the application post offer, so we are chasing for you too!
Experts in Mezzanine development finance
At Mortgage Lane, we excel in mezzanine development finance, supporting both seasoned investors and newcomers in various development projects. Our network of competitive lenders ensures swift and effective financial solutions, crucial for meeting the demanding schedules typical in property developments. Trust us to skilfully manage the complexities of your venture with our advanced financial offerings. Specialist scenarios we cater to include:
- Development of high-rise buildings
- Conversion projects from commercial to residential or other uses
- Partially constructed building schemes
- Modular construction projects
- Developments with restricted covenants or specific usage stipulations
- Complex and unique building types
build costs over budget
At Mortgage Lane, we address a common scenario faced by property developers, the need for additional funding when the existing lender is unwilling to increase the loan size. Mezzanine funding emerges as a viable solution in these situations, allowing borrowers to increase their funding capacity without refinancing the entire project.
Understanding LTGDV and Loan to Cost:
Loan to Gross Development Value (LTGDV) Up to 80%: LTGDV refers to the loan amount as a percentage of the Gross Development Value of the project once completed. By providing mezzanine funding up to 80% LTGDV, we can significantly increase the available capital, enhancing the overall loan amount up to 80% of the project’s anticipated market value upon completion.
Loan to Cost (LTC) of Up to 95%: LTC represents the loan amount as a percentage of the total cost of the project. Offering up to 95% LTC means that the combined financing (senior debt plus mezzanine funding) can cover up to 95% of the project’s total development costs. This is particularly helpful for developers who find themselves short on funds to complete their projects.
Mortgage Lane’s Role:
As a broker, Mortgage Lane provides access to a network of lenders capable of offering mezzanine development finance. This is especially beneficial for developers who have exhausted their funding options with their primary lender and are looking to secure additional financing without having to refinance the entire facility.
By opting for mezzanine funding, developers can obtain a secondary loan that complements their existing financing arrangement. This is an ideal solution for those who have encountered unforeseen costs or underestimations in their budget, ensuring that they can complete their projects without major disruptions or the need for full refinancing.
Conclusion:
For developers facing financial constraints and unable to secure further advances from their current lenders, Mortgage Lane’s expertise in mezzanine development finance offers a strategic pathway. We facilitate the process of acquiring that crucial additional funding, helping developers bring their projects to successful completion.
development mezzanine finance possibilities
In the context of residential property development, mezzanine funding is particularly useful in several specific scenarios:
Bridging Funding Gaps: When the primary loan (senior debt) doesn’t cover the entire cost of a residential development project, mezzanine funding can provide the additional capital required. This is common in larger-scale developments where the total costs exceed the amount a bank is willing to lend
Enhancing Project Scope: If a developer decides to expand the scope of a project mid-development – for instance, by adding more units or enhancing specifications – mezzanine finance can supply the extra funds needed for these enhancements.
Acquiring Additional Land or Properties: Developers may use mezzanine funding to acquire adjacent land or properties that become available during the course of a project, enabling project expansion or improvement.
Covering Unexpected Costs: Construction and development projects often face unforeseen costs due to various reasons like construction delays, changes in material costs, or unanticipated regulatory requirements. Mezzanine funding can bridge this unforeseen financial gap.
Completing Projects Faster: Developers might opt for mezzanine finance to speed up project completion. Faster completion can lead to earlier sales and revenue, which might offset the higher cost of mezzanine financing.
Securing Project Viability: In cases where senior debt lenders require the developer to have more ‘skin in the game’ (i.e., a higher equity stake), mezzanine funding can be used to meet this equity requirement without diluting the developer’s own capital
Redeveloping Existing Properties: For projects that involve the renovation or conversion of existing properties (such as turning an old building into residential units), mezzanine finance can provide the necessary funds for redevelopment, especially when the costs exceed initial estimates.
In all these scenarios, mezzanine finance is attractive due to its relatively quick availability and the flexibility it offers in terms of repayment structures compared to traditional senior debt. However, given its typically higher interest rates and potential equity components, it should be considered after evaluating its cost against the projected returns of the residential development project.
additional units or planning permission
For our page on Mezzanine Development Finance, we focus on the solutions available for borrowers when their existing lender won’t increase the loan size. Mezzanine funding can be a critical tool in these scenarios, particularly when developers receive additional planning permission during their initial development and need more capital than initially anticipated. This type of finance is a viable option for those looking to secure a second loan rather than refinancing the entire facility.
Understanding LTGDV and Loan to Cost:
Loan to Gross Development Value (LTGDV) – 65-80%: LTGDV refers to the amount of the loan in relation to the projected market value of the property once the development is complete. With mezzanine funding, we can increase the LTGDV up to 65-80%, offering developers greater leverage and more capital to work with, especially useful when additional planning permission expands the scope of the project.
Loan to Cost (LTC) – Up to 95%: LTC measures the loan amount against the total cost of the project. Lenders offering up to 95% LTC means that the combined funding (primary loan plus mezzanine finance) can cover up to 95% of the development costs. This is particularly advantageous for developers who need to adjust their financial plans mid-project due to expanded development scopes or unexpected expenses.
Mortgage Lane’s Role:
At Mortgage Lane, we are a broker with access to a network of lenders specialised in mezzanine development finance. This is essential for developers who find themselves in need of additional funds after obtaining extra planning permission for their ongoing projects. Mezzanine finance allows these developers to secure the necessary extra capital without the complexity and potential delays of refinancing their entire existing loan.
We understand the challenges developers face when project scopes change, particularly after receiving additional planning permission. Our role is to connect these developers with the right lenders, offering them the financial flexibility to adjust their projects without disrupting their primary financing arrangements.
Conclusion:
For developers who encounter the need for additional funding due to changes in their project’s scope, such as receiving extra planning permission, Mortgage Lane’s expertise in mezzanine development finance offers a practical solution. We help navigate the process of obtaining secondary financing, ensuring projects can proceed smoothly without the need to refinance existing loans.
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What is Mezzanine development finance?
Mezzanine development finance in the UK is a secondary form of financing used in property development. It fills the funding gap between a primary loan or 1st charge (senior debt) and the developer’s equity. This type of finance is riskier and thus carries a higher interest rate than senior debt, but it offers more flexible repayment terms. It’s commonly used when developers need additional funds beyond what they can obtain through a senior development lender that may have lower maximum lending guidelines.
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About Mezzanine FINANCE
Will I need local searches to secure mezzanine funding?
When securing development mezzanine finance, the importance of local searches or the strategic use of an indemnity policy cannot be overstated. Local searches provide essential insights into planning permissions, legal restrictions, and other vital records from local authorities, crucial for evaluating the viability and potential risks of a development project. Although not a legal requirement, they are frequently requested by lenders in the mezzanine finance sector to ensure the investment’s security and appropriateness.
At Mortgage Lane, we understand the complexities involved in acquiring development mezzanine finance and can assist you in navigating these requirements. We recognise that local searches are typically valid for up to 6 months and, in certain circumstances, can be reused if they remain relevant to the ongoing project. If the searches are outdated, lenders might require new searches. Alternatively, in some cases, lenders may accept an indemnity policy as a substitute.
Understanding the Use of an Indemnity Policy
An indemnity policy can serve as a protective measure against possible losses arising from specific issues, such as unknown planning permissions or hidden legal defects, that would typically be identified in local searches. This policy acts as insurance, offering financial protection to both developers and lenders against unforeseen costs linked to these risks. Although it doesn’t resolve the underlying issues, it provides a safeguard in terms of financial liability.
Mortgage Lane’s Role in Assisting with Development Mezzanine Finance
At Mortgage Lane, we are equipped to guide you through the intricacies of securing development mezzanine finance, including advising on the necessity and relevance of local searches or the suitability of an indemnity policy. Our expertise in this domain ensures that you make informed decisions that align with your project requirements and the lender’s stipulations.
Navigating Local Search Requirements and Indemnity Policies with Mortgage Lane
Dealing with findings from local searches or opting for an indemnity policy requires careful consideration and strategic planning, especially in relation to mezzanine finance. We at Mortgage Lane are here to assist you in understanding the implications of these aspects on your financing terms.
In summary, Mortgage Lane is your partner in not only securing development mezzanine finance but also in ensuring that all due diligence, including local searches or indemnity policies, is thoroughly addressed to meet both your project’s needs and your lender’s requirements.
Do I need experience for mezzanine development finance?
At Mortgage Lane, we understand that all ventures start with an initial step. In the realm of mezzanine development finance, while certain competitive lenders may prefer borrowers with previous development experience, especially for complex projects, it’s important to recognise that numerous lenders do not require prior experience in property development. This holds true for a wide range of projects, including those that involve significant renovations or construction. Our role is to guide you through this process and help you find a lender that matches your unique circumstances and meets the specific needs of your mezzanine development project.
What is the term of a mezzanine development finance loan?
The terms for mezzanine development finance typically range from 1 to 60 months, providing flexibility to suit various project timelines. Recognising that these loans are integral to property development, developers often aim to settle these financial agreements promptly, driven by the potential for profit.
In mezzanine development finance, lenders frequently set a minimum term ranging from 1 to 3 months. This condition means that once your development project is complete, you can exit the finance agreement shortly thereafter, often right after the minimum term ends. This aspect of mezzanine development finance offers developers a degree of flexibility, allowing them to align their exit strategy with the completion timeline of their project and financial objectives.
What is a closed legal panel?
In the realm of mezzanine development finance, it’s common for specialist lenders to use a closed legal panel. This panel consists of a specified list of solicitors who are authorised to represent these lenders. When you seek mezzanine finance, you’ll typically select your legal representation from this list. In some instances, joint representation is possible, where the chosen solicitor’s firm represents both you and the lender.
However, certain lenders with a closed panel might only provide sole representation, representing themselves exclusively. In such scenarios, you have the option to appoint your own solicitor, as long as they fulfil specific criteria set by the lender. It’s crucial to be aware that in situations of sole representation, you will be liable for two sets of legal fees: one for your solicitor and another for the lender’s solicitor.
This approach in mezzanine development finance ensures that all legal aspects of the transaction are handled by professionals familiar with the specific requirements and intricacies of this type of financing, while also giving you some flexibility in choosing your legal representation.
What entities can take out mezzanine development finance?
We arrange cost-effective mezzanine development finance for:
- Individuals
- Special Purchase Vehicles/Limited Companies
- Limited Liability Partnerships (LLP)
- Trading companies
- Charities
- On/Offshore Trusts
Is Mezzanine development finance regulated?
It is important to note that mezzanine development loans are not covered by the Financial Services Compensation Scheme, so borrowers should ensure they are dealing with a reputable lender.
How is interest charged on a development mezzanine loan?
In mezzanine development finance, it is common for lenders to add the product fee and the interest for the loan term to the total loan amount. This results in the capitalization of both the interest and product fee, meaning they are included in the total loan balance, rather than being paid on a periodic basis.
How does the Loan to Gross Development Value (LTGDV) affect the interest payable?
In mezzanine development finance, as the LTGDV ratio increases, so does the interest payable balance. This happens because the interest is calculated on a larger loan amount, which grows in line with the increase in the Gross Development Value (GDV) of the development project.
Is there a typical maximum LTGDV ratio that lenders consider for mezzanine development finance?
Lenders in mezzanine development finance usually adopt a cautious stance regarding the LTGDV ratio. Most lenders prefer not to finance projects requiring an LTGDV ratio exceeding 80%, as this helps manage risk and ensures the loan amount remains proportionate to the value of the completed development.
How does adding the product fee and interest to the loan impact the total cost of the loan?
When the product fee and interest are added to the loan in mezzanine development finance, the initial loan amount increases. This means that over the loan term, the borrower ends up paying interest on a larger principal amount, which in turn increases the total cost of the loan.
Can developers pay the interest periodically instead of rolling it into the loan?
The option to pay interest periodically in mezzanine development finance varies based on the lender’s terms. While some lenders may offer this option, it is less common, with many preferring to capitalise the interest into the loan.
What should developers consider when evaluating the impact of interest payments on their project?
Developers should carefully consider the total cost of the loan, including capitalised interest, when planning their development projects. Assessing the project’s feasibility with the increased loan amount and ensuring that the final LTGDV ratio is within viable limits is essential.
Are there any strategies to mitigate the impact of interest payments in mezzanine development finance
To mitigate the impact of interest payments in mezzanine development finance, developers can focus on efficient project planning to ensure timely completion, thereby reducing the total interest accrued. Additionally, exploring specific financing incentives or tailored options for development projects can lead to more favourable financing terms.
Minimum income for a hotel development loan?
In securing a mezzanine development loan through Mortgage Lane, having a regular income isn’t always essential. However, lenders will closely examine your exit strategy. If your plan involves refinancing the project upon completion, they will scrutinise your income to determine if it meets the criteria set by potential remortgage lenders. This assessment serves as a ‘sense check’ to confirm that your income levels are appropriate for the terms of the available refinancing options. Alternatively, if your exit strategy is to sell the developed property, the lender will concentrate on evaluating the expected Profit on Cost (POC) levels. This approach ensures that the financial aspects of your mezzanine development loan are aligned with your project’s end goals.
Can I get a mezzanine development loan with adverse credit?
Similar to traditional mortgages, there are lenders within the mezzanine development finance sector who consider applicants with adverse credit histories. If you have a history of missed payments, County Court Judgments (CCJs), defaults, or even an Individual Voluntary Arrangement (IVA), Mortgage Lane can assist you in finding a suitable lender for your development loan. For those discharged from bankruptcy, the range of options generally broadens after 3 years, and even more so after 6 years.
In mezzanine development finance, it’s important to note that lenders not only adopt a ‘non-status’ approach in their underwriting, focusing on the project’s profitability potential and the viability of the exit strategy, but they also pay close attention to how the original loan facility has been maintained. This means that while they may be more focused on the project itself rather than the applicant’s credit history, they will also consider the management of any existing finance. Good maintenance of the original facility can be a positive factor in the lending decision. This balanced approach allows developers with adverse credit, who have demonstrated responsible financial management in their ongoing projects, to secure the financing they need for their development projects.
Do I need a minimum income for a mezzanine development loan?
No, a minimum income is typically not a central underwriting requirement for a mezzanine development loan. In mezzanine development funding, since projects are often geared towards sale or utilisation upon completion, lenders focus more on the project’s economic viability rather than the borrower’s personal income. Key financial indicators such as Profit on Cost, Loan to Gross Development Value (GDV), and Loan to Cost (LTC) are the primary metrics that lenders assess to ascertain the financial soundness of the development project.
Where do you broker mezzanine development finance in the UK?
We assist our clients with mezzanine development finance in England, Wales, Scotland and Northen Ireland.
Learn more about mortgages with Mortgage Lane
At Mortgage Lane, we see the most complex of mezzanine development finance applications, some of which make a good read for investors looking to learn from other applicants challenges, or for those effected by the topics! See more refurbishment loan topics covered in our blog here.
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