Mezzanine Finance is a form of subordinated debt behind that of senior debt in terms of ranking on any claim on property assets and ahead of equity. Mezzanine debt is generally secured by a second mortgage.
In short, Mezzanine Debt fills the gap between the property developers equity and the amount of senior debt available.
A Mezzanine Loan is generally only provided when the project is ready to begin, and the relevant risk mitigants are in place.
Mezzanine Finance provides the following benefits:
- It gives the developer the power to determine the level of equity (if any) he wishes to contribute to a project
- It is cheaper generally than equity, and provides a higher project rate of return on their equity
- It allows the property developer to use his equity elsewhere and effectively diversifying risk
- It allows the property developer to continue with the project on a 'standalone' basis
- Control is retained by the property developer as opposed to Joint Venture partners
- Mezzanine Finance is passive provided the project is performing in line with expectations
- Interest is tax deductible, profits are not
- It can be raised relatively quickly as opposed to equity
- It will normally reduce the risk to the Senior Debt provider, and could lead to a lower rate