Mezzanine finance
When considering whether to proceed with a construction project, an assessment of funding options will generally be carried out. One of the options may be 'mezzanine finance', particularly in times of economic hardship when banks may take a more risk adverse stance in relation to property development.
Mezzanine finance provides a second layer of debt funding to bridge the gap between the senior debt (typically provided by a bank or fund), and the actual requirements of the developer. In the event of default the mezzanine lender will be paid only after the senior lenders. Equity investors are than last in line and receive whatever is left.
This means mezzanine financiers are bearing more risk than senior lenders, but less than equity owners.
Returns on investment for lenders of mezzanine finance can be around 20%. While this is typically more expensive for the developer than senior debt, it may be less expensive in the long term than their own equity, and as short-term funding it can help to unlock potential profits, so the longer-term benefits can be considerable.
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