While stretched senior lenders have been a growing force in the development funding market the traditional mezzanine lenders have been refining their products to compete with the new market dynamics.
Mezzanine lending is a specialist second charge loan that is specific to property development. It is designed to cover the shortfall between the client’s cash input and the senior debt finance.
Usually, these lenders require at least 10% cash input from the borrower and will cover the 15-20% shortfall on the total costs and their funds will be released on day 1. This leaves the senior lender to control the project on a cost to complete basis, so after the first drawdown the mezzanine lender will monitor progress on the site, but not be actively involved in progress payments.
Mezzanine lending can be quite varied, but rates of 15-20%pa are currently be quoted.
In terms of the credit approval process the mezzanine lenders will normally use the same survey, QS reports etc. as the senior lender and in some instances will also use the same solicitors.