Mezzanine finance is an additional subordinated loan (behind the senior debt provider) which is generally secured by a second mortgage over the property. Mezzanine finance is used when the senior debt (i.e. the primary loan secured by a first mortgage) plus the developer’s equity is not enough to cover the total development cost of the project.
Mezzanine finance can also be used to reduce a developer’s equity to allow them to use their equity for other projects and “in doing so” diversifying their risk.
Mezzanine finance comes at a higher cost, but reducing the developer’s equity contribution will increase the return on equity considerably.
In most instances, monies invested into a project will be invested in accordance with the following priorities when Mezzanine Finance is used:
All the Developer’s Equity;
All the Mezzanine Finance; and then
All the Senior Debt
Typical Lending Parameters for Mezzanine Finance
Up to 80% LCR
Up to 85% LCR
Typical Contributions for Projects with Mezzanine Finance
Total Development Cost
15% Developer Equity
15% Mezzanine Debt
70% Bank Debt
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