Sep

Mezzanine Finance – a solution for building homes outside the big corporates

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The UK housing shortage will not be successfully addressed if we rely entirely on the major house builders. This is the view that was expressed by the government housing White Paper at the beginning of the year, which recognised both the importance of creating a diverse construction sector and the significant contribution that can be made by the development of smaller sites.

Securing the appropriate funding will be key in determining whether small developers are able to step up to the challenge and take advantage of this opportunity and, for many, achieving the right leverage at the right price will be the main consideration.

Conventional senior debt development finance was traditionally limited to around 50% gross development value (GDV), but it is now possible to secure finance up to 70% GDV with some specialist providers. This is known as stretch-senior debt and, while it offers greater leverage, it is also more expensive than senior debt.

An alternative to stretch senior is to split the financing into two layers of debt instead of one. The first layer, the senior, can be structured conservatively at low cost, often by a large bank. On top of this senior layer sits a strip of mezzanine debt from a specialist provider in a second charge, subordinated position.

In isolation mezzanine finance, or “mezz”, looks expensive, but when it is blended with a bigger chunk of cheap senior debt, the overall cost can be lower than a stretch senior deal can achieve.

There is more work in assembling and managing a structured solution that includes mezz, but for some developers it can provide a cheaper way of securing increased leverage on their schemes.

If you are a developer and would like to discuss how you could use mezzanine finance on your next development, please complete the contact form below and we will be happy to help.

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