Freeing up cash with mezzanine finance

Mezzanine finance can help developers manage cash liquidity and keep their eye on the main game, says Development Finance Partners director, Matthew Royal.

Mezzanine funding is simply the term used for funding the gap between a primary mortgage and the total development costs, Royal says.

“Mezzanine finance – as the name alludes – creates a floor between the bank’s finance and the total cost of the project,” Royal explains.

“When the bank funds, say, 70 per cent of the total cost of a project, ordinarily the balance must come from the developer. But mezzanine financing can replace at least per cent of the developer’s equity requirement.

“This means the developer can use the freed-up equity to bring forward the development pipeline – spending the money on development applications, presale commissions, option fees, deposits on other sites, or to fund the interest costs on other sites, for example,” Royal explains.

“It also means that the developer doesn’t risk being left without working capital to fund anything except basic overheads.

“If there is a shortfall or blowout on a project, there is additional cash to fund these cost overruns. Mezzanine financing can be a risk management strategy to ensure that an operation won’t go out of business.”

Royal says there’s another often overlooked advantage of mezzanine finance.

“The majority of medium-size private developers rely on investors to fund their projects. This means they need to pay back those investors out of profits. By adopting mezzanine financing, developers aren’t paying away the profit, only the interest cost. This means less investors are needed in the venture.”

While there’s a perception that mezzanine financing is expensive, it can help developers complete larger or more projects than they would otherwise.

“It can help you start a project sooner. Because you have less debt with the bank, you don’t have to get the same number of presales to kick-start a development,” Royal adds.

The reduced timeframes and holding costs associated with being able to start a project sooner, not to mention fewer marketing costs, can lead to massive savings.

“While it’s easy to take a one-dimensional view of mezzanine finance, it’s important to look at the bigger picture to understand the value.  Smart developers do.”

DFP advises property developers on the available range of low doc and no doc capitalised interest products at affordable rates. To find out more, contact Matthew Royal at Development Finance Partners.