Mezzanine Finance is best described as a debt top up. It is used to cover shortfalls between the Developer’s equity contribution and the level of debt provided by a senior lender. These gaps can appear for several reasons. Senior lenders may be restricted due to credit or security policies from stretching to meet the Developer’s contribution. Alternatively, the Developer may have their funds currently tied up in other projects, or they simply may wish to contribute as little as possible and are happy to pay for Mezzanine Finance.
Mezzanine Finance is typically provided by Private Funders and is priced according to the strengths and weaknesses of each individual deal. When pricing, a lender they will typically focus on the following points:
- Presales – are there sufficient presales are in place to cover the Mezzanine Finance?
- LVR – is the LVR low?
- Strength of the developer – do they have a strong development background?
- Strength of the builder – is the builder a well regarded, experienced builder?
- Location – is the security metro based?
- Strength of the developers balance sheet – do they have a strong net wealth position?
If any of these points are not completely satisfied then it would be common to find pricing at the higher end of the spectrum.
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