A mezzanine loan will sit behind the senior debt lender as a second charge and is a critical part of the capital stack. Mezzanine lenders will normally receive their money from a development after the senior lender which is why the cost and risk is more with this type of loan.
Mezzanine loans can also be a great way to raise development finance quickly. They can be used to contribute towards purchase of land to develop, development costs for residential new builds and the purchase or development of commercial buildings. Mezzanine lending can be a great way to plug a gap if there are down valuations. A down valuation can cause a senior debt lenders to reduce their overall lending and this is where Mezzanine lending can play a vital role.
For developers, delays to completion of a development project due to lack of funds can be extremely costly. A mezzanine loan can bridge the funding gap to allow the developer to complete on schedule.
When using mezzanine lending it is key to calculate the overall cost of funds across the project. This will give a blended total of how much the senior debt and the mezz debt costs together.