Mezzanine finance usually exists at a second tier of lending and, as such, will usually command a higher rate of interest, which may be convertible into equity. For example, the principal lender may lend 65 per cent LTV on a property with a first charge and the mezzanine finance may provide an additional 20 per cent LTV on a second charge over the property.

As a result, such debt is often seen as risky, and can end up as quite expensive for a prospective client - interest rates are generally as high as 2.5 per cent a month. It can potentially be more problematic than, for example, joint-venture funding, where proceeds are guaranteed to be shared equally, as if the loan should default, the first charge debt would take precedence.

For this reason, both specialised and more generalised lenders tend only to deal with experienced developers whose projects are ultimately profitable. There are significant variables to take into consideration to ensure that mezzanine finance is appropriate and can be successful. 

As CEO of Dragonfly Finance, Jonathan Samuels oversaw the acquisition of specialist mezzanine lender Maslow Capital in September 2011. He told us that there were several factors which determined the success of a mezzanine deal:

“First and foremost, the location of a property or project will render a project viable or not from the outset, as will the availability of planning permission. If this hasn’t been obtained, a bridging loan might well be more appropriate.

“Secondly, it’s crucial to consider whether the borrower knows what they’re doing with the investment. Typically we’ll look for some evidence of experience in their chosen field – it’s not particularly wise to lend on a 20-flat redevelopment if your client has only dealt with houses in the past.

“On top of these, the amount of money needed is obviously a contributing factor. It’s worth paying attention to the loan-to-cost (LTC) value required by a borrower – at Dragonfly we offer 80 per cent - which can be determined from a detailed development appraisal. Thiswill outline the details of a proposed project, its purchase price, contingency fees, total material costs and the contractors used.

Michael Magee, a mezzanine and development finance lender at The Development Finance Bank, outlined similar guidelines. He said: “You have to know every detail of a development – who owns the site, its location, the style and size of proposed units, current and purchase values, value once completed, build costs, planning situation and full information about the senior debt. Even comparable sales figures are useful.”

Daryl Williams, from property finance brokers Winchester Financial, similarly outlined that an appropriate candidate for mezzanine finance needs to be reliable. He said: “Experience is key, and they must be able to demonstrate that they have built similar unit types, and quantity, over the past few years.

“A good net asset position, with no adverse credit, is also an advantage. Alarm bells start to ring once a client has already spoken to several funders who have declined them before coming to you.”

He went on to describe the ideal candidate for a mezzanine debt as a “frequent developer, in a strong financial position, with a good knowledge of the area and preferably based in London, as the majority of mezzanine funders like the London boroughs and the south east.”

Michael also noted that mezzanine’s niche uses mean that not every client is suitable. “For mezzanine to work, developers have to work on high profit margins so if the deal shows a return of sub 20 per cent it is unlikely a mezzanine lender is going to want to lend at the max LTV. Mezzanine funding, when used correctly, is not for cash strapped developers, it is for developers who have the capacity to do multiple projects and therefore give them the best possible return for the equity they have available.”

Andy Blenkinsop, a partner at specialist development lender Pluto Finance, noted that despite developers often being shocked by the rates charged by mezzanine finance, there was no cause for alarm. 

He said: “It’s imperative that developers are realistic in their assumptions of gross development values, costs and program. If the projections prove unrealistic then this can have a dramatic effect on the total interest charge. By the very nature of their industry developers have to be optimistic but any uncertainties should be covered by adequate allowances for contingencies within appraisals.”

Jonathan concluded: “If I could offer any advice to a broker considering mezzanine finance for their client, it would be to make sure to ask any questions and get any information you need up front. Get the full picture of what you’re undertaking as soon as possible, as mezzanine deals are rarely straightforward and require as firm an understanding as possible in order to succeed.“

Andy, Michael, Jonathan and Daryl are all available for further help regarding mezzanine products. Contact them on:

[email protected] / 

Michael - 

[email protected] /

0778999 8000 

Jonathan - 

[email protected] / 0800 294 6850

Daryl -

[email protected] / 01962 826780