Traditionally development projects have been funded almost exclusively by banks, with more recent non-bank participants entering the market. The amount of funding is typically determined by a percentage of the actual costs of the development and generally ranges from 60%-80% of the hard costs of the project, limited by location, type of project, amount of pre-sales, etc. This type of funding is typically referred to as Senior Debt.
Property Developers have always been looking for more innovative ways to fund their projects and one such way is Mezzanine Finance. Mezzanine Finance is a form of subordinated debt behind that of a Senior Debt in terms of ranking on any claim on property assets and ahead of equity. Mezzanine Finance is generally secured by a second mortgage and a second ranked Fixed and Floating Charge over the borrowing entity and its Directors. In short Mezzanine Finance fills the gap between the Property Developer’s equity and the amount of senior debt available. Mezzanine Finance is only provided when the project is ready to begin, and the relevant funder requirements are in place.
