What is Mezzanine Finance?
Mezzanine finance fills the gap between the debt and equity needed to complete a project. The mezzanine finance usually acts like a hybrid between debt and equity. It may have a fixed rate (like a loan) and have some participation in the profit of an asset (like equity).
Mezzanine finance fills the gap between the debt and equity needed to complete a project. The mezzanine finance usually acts like a hybrid between debt and equity. It may have a fixed rate (like a loan) and have some participation in the profit of an asset (like equity).
Who uses It?
Real estate investors who do not have the equity required to complete a project can benefit greatly from mezzanine finance. The shortfall prompting a need for mezzanine finance may be due to insufficient initial equity, a partner investor pulling out, a term/ratio change, a price change, or a combination of these factors.
For example, if you are looking to buy a $1,000,000 building and the lender will advance $700,000, you need $300,000 in equity. If you only have $200,000, you could use $100,000 in mezzanine finance to obtain the $300,000 required.
Real estate investors who do not have the equity required to complete a project can benefit greatly from mezzanine finance. The shortfall prompting a need for mezzanine finance may be due to insufficient initial equity, a partner investor pulling out, a term/ratio change, a price change, or a combination of these factors.
For example, if you are looking to buy a $1,000,000 building and the lender will advance $700,000, you need $300,000 in equity. If you only have $200,000, you could use $100,000 in mezzanine finance to obtain the $300,000 required.
How it works:
Once the need for mezzanine finance is established, the primary lender will need to approve the use of mezzanine finance to make up the equity. Once this is done, the mezzanine financier will undertake their financial assessment to determine what they require to make their investment. Mezzanine financiers are very much partners with you, and hence will look closely at the project and your track record/competency. A typical project may require 30% equity, and the mezzanine financier might contribute up to 15%, as long as you can provide the other 15%. The total equity (your equity plus the mezzanine) is then used with the debt to fund the project. The debt lender will have a first charge in the property and the mezzanine lender will have a second charge. When the property is sold, the lender is paid off first, the mezzanine funder is then paid off (including any profit participation) and then the equity owner is paid.
Mezzanine finance can either be used as a replacement for equity, or to allow an investor to buy a more expensive asset and make a greater potential profit.
Once the value of the asset has risen, the debt can be refinanced based on a higher valuation. The objective would then be to increase the debt by a sufficient amount to pay off the mezzanine finance, the interest, and the profit participation.
Mezzanine finance is an equity instrument that typically has an interest rate attached to it. The interest on the finance will vary depending upon the provider and the project, but might be between 4% and 12%, in addition to participation in equity appreciation.
There is typically an arrangement fee, which may be 1% to 2%.
SilverLink mezzanine finance facilities are available in amounts ranging from $2,000,000 to $100,000,000.
Once the need for mezzanine finance is established, the primary lender will need to approve the use of mezzanine finance to make up the equity. Once this is done, the mezzanine financier will undertake their financial assessment to determine what they require to make their investment. Mezzanine financiers are very much partners with you, and hence will look closely at the project and your track record/competency. A typical project may require 30% equity, and the mezzanine financier might contribute up to 15%, as long as you can provide the other 15%. The total equity (your equity plus the mezzanine) is then used with the debt to fund the project. The debt lender will have a first charge in the property and the mezzanine lender will have a second charge. When the property is sold, the lender is paid off first, the mezzanine funder is then paid off (including any profit participation) and then the equity owner is paid.
Mezzanine finance can either be used as a replacement for equity, or to allow an investor to buy a more expensive asset and make a greater potential profit.
Once the value of the asset has risen, the debt can be refinanced based on a higher valuation. The objective would then be to increase the debt by a sufficient amount to pay off the mezzanine finance, the interest, and the profit participation.
Mezzanine finance is an equity instrument that typically has an interest rate attached to it. The interest on the finance will vary depending upon the provider and the project, but might be between 4% and 12%, in addition to participation in equity appreciation.
There is typically an arrangement fee, which may be 1% to 2%.
SilverLink mezzanine finance facilities are available in amounts ranging from $2,000,000 to $100,000,000.
Key Benefits
- Helps Projects Succeed - An investor may have spent a lot of time and money on a project that is a viable and potentially profitable venture. Circumstances may change, leaving the financing of the project insufficient. This might be due to another investor withdrawing their funds, the lender making a last-minute change, the lender dropping out and a new lender offering less favorable ratios, or the operator having to make an improved bid to secure the deal. In these circumstances, rather than walking away from the project, the use of mezzanine finance allows the operator to complete the project.
- Operator Can Undertake Bigger Projects and Increase Profit - An operator may have limited capital, constraining the size of the projects they can undertake. By partnering with a Mezzanine financier, they can increase the size of their potential projects. For example, if the investor has $3,000,000 and lenders lend 70% of the cost, then the maximum size is $10,000,000. If the Mezzanine financier will match the $3,000,000 by taking on 15% of the equity in a project, then the equity will increase to $6,000,000 and potential project size increases to $20,000,000.
- Investors Can Spread Risk - By utilizing mezzanine finance, investors can spread their equity over more projects. In the example above, the investor can invest in two $10,000,000 projects, rather than one $20,000,000 project.
