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Mezzanine Loans
On some occasions the Senior Loan does not provide the required amount to complete your project. In this case a Mezzanine loan can be used to complete the full requirement.
Mezzanine loans are sometimes known as “Junior Debt” because they are facilities that are used to top up the senior debt which holds a first legal charge. The junior loan will hold a second legal charge and rank behind the senior lender in repayment and other rights.
Typically mezzanine loans will take the total facility up to 90% of the cost and therefore it provides valuable capital to reduce the equity required from a borrower. Mezzanine loans are perceived to carry more risk due to the higher level of gearing and its junior ranking and therefore this will carry a higher cost than the senior loan.
MEZZANINE LOAN EXAMPLE
mezzanine Loan Examples
Mezzanine finance can be a useful tool in your finance structure to help you reduce the amount of equity you need to secure your opportunity.
Project
- £5,000,000 – Gross Development Value
- £1,500,000 – Land Purchase
- £2,000,000 – Construction Cost
- £500,000 – Finance Cost
- £4,000,000 – Total Cost
- Bank Facility: 75% of Cost
- £3,000,000 – Total Facility equating to 75% of £4m Total Cost
- £2,000,000 – Construction Cost
- £500,000 – Finance Cost
- £500,000 – Remaining facility provided for Land Purchase
Therefore the borrower will need to inject £1,000,000 of equity alongside the bank facility of £500,000 to purchase the development site.
Mezzanine Facility: Up to 90% of Cost
- £4,000,000 – Total Cost
- £3,600,000 – Total Loan up to 90%
- £3,000,000 – Senior Loan Secured
- £600,000 – Mezzanine Loan could be achieved
There would be an element of the loan that would be used for finance costs but it would significantly reduce the equity requirement from £1,000,000 if only Senior Debt was used.
If you are looking to reduce your equity contribution further then you could look at obtaining equity investments or a joint venture partner.
When you work with Aureum Finance you will benefit from a team that holds decades of lending experience. We are here to help you find the best solution for your funding requirements.