Hi! David here! If your bank told you that you have maxed out your leverage, and you just need a bit more funds to finalise your development project, what options do you have?
Mezzanine funding (or second mortgage funding), is ideal for property developers who want to preserve their own equity and do not want to bring in a Joint Venture partner.
A Mezz Lender will typically be prepared to advance up to around 90% of the total development cost, with the remaining 10% considered to be the project equity which the developer is required to contribute as their “skin in the game” or risk capital.
If you’re looking for mezzanine financing, take into account that lenders will look at factors such as profitability, your business track record, and viable plans for expansion. If you are not able to pay the borrowed money back in time, the lender can claim equity interest in your company or even a right to ownership.
Mezzanine finance is typically used to fund property projects or complete expansions. If additional costs are incurred during a project and your bank loan won’t cover it, you can take out a mezzanine finance loan and secure it to your property. Unsecured loan options are also available. The loan you’re approved for is typically based on the property’s assets and the equity that is projected from the completion of the project.
What are the PROS?
- Secure additional financing. If you cannot get as much money as you require through a business or commercial loan, mezzanine finance offers you an alternative option to complete your project without straining your cash flow.
- Quick access to funds. Providers of mezzanine finance don’t apply as much due diligence as conventional lenders, so you can expect to hear about your application’s status soon after applying. Getting access to your approved funds should not take long either, meaning fewer delays in your project.
- Equity on your balance sheet. When your business secures mezzanine finance you get to treat it as equity on the balance sheet, which can make getting other loans from conventional banks simpler.
- Hold on to properties for longer. With mezzanine finance in place, you have the ability to hold on to your properties for longer while waiting for equity to build.
What are the CONS?
- High interest rate. Since mezzanine finance providers view their investments as high risk, they charge higher interest compared to conventional business or commercial loans. You can expect to pay even higher interest if you can’t provide some form of security.
Find out if this is right for you. Speak with us today.
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