Real Estate Development Mezzanine Loans

by Jacques
(Centurion)

Thank you for the informative website and intelligent input. Please allow me to ask a question with a different spin...

I have been granted a development loan to buy the land and do the development.

However, the 30% equity/cash requirement by the bank is a little steep for my current ability. Is there any way of obtaining finance for this 30%, and if so, what is this type of financing called?

Jacques

Hi Jacques,

Yes, it is called Mezzanine Finance.

In real estate finance, mezzanine loans are often used by developers to secure supplementary financing for development projects (typically in cases where the primary mortgage or construction loan equity requirements are larger than 10%).

These sorts of mezzanine loans are often collateralized by the stock of the development company rather than the developed property itself (as would be the case with a traditional mortgage).

This allows the lender to engage in a more rapid seizure of underlying collateral in the event of default and foreclosure.

Standard mortgage foreclosure proceedings can take more than a year, whereas stock is a personal asset of the borrower and can be seized through a legal process taking as little as a few months.

To read more on this subject just Google the term Mezzanine Finance and you'll come to grips with the topic quickly.

One final thoughts for you Jacques.

If the lender requires 30% equity they are doing that to shore up their "risk."

Have you assessed the project risk in the current market conditions?

If times were normal and there was no credit squeeze on, what would a lender normally ask as an equity percentage?

The difference is the lenders assessment of their risk in relation to your projects risk, as well as your personal financial position; so please think hard on this issue and give yourself "frank answers."

Mezzanine debt is more expensive debt than a normal loan and so will reduce your profitability. Please calculate this carefully as the borrowed funds will attract interest from Day 1 of the project.

Hope this helps you Jacques.

Colm Dillon
www.realestatedevelopmentcoach.com






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Mezzanine Finance
by: Anonymous

Thank you for those comments, Colm. 30% is the current norm in South Africa. The project has a yield of more than 75%, due to the low land cost relative to it's prime location....

Hi Anonymous,

You are welcome.

I feel it is necessary to qualify what you mean by a yield of 75%.

In a residential condo development we generally talk about a Profit on Cost as a means of describing a % return and this is is not an "annual return."

In Commercial office or retail development, the next point to make is to distinguish if the return quoted is a "Return on Equity" on a "Return on Total Cost."

All of these points are important when making a financial application to a lender and many new developers do not know what lenders are looking for in a development as a basic minimum or how to present their submission.

However you know, as it is all set out in my e-courses as well as a fully completed Development Finance Application for you to amend as call your own.

Bye,

Colm Dillon
www.realestatedevelopmentcoach.com

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