Property development finance: Stretch Senior and Mezzanine Finance explained

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Residential property development finance can seem quite complicated and here we take a look at what Stretch Senior and Mezzanine Finance is.

An alternative to the high street lending, Stretch Senior and Mezzanine Finance is more often arranged with a principal lender, who can create a bespoke financing solution for residential developers. Principal lenders are preferred due to being able to make quicker lending decisions with more competitive terms.

These loans are designed to fund the development houses, flats, conversions and new builds.

Stretch Senior Development Finance

Stretch Senior Development Finance is a first charge debt that can be used to:

  • Fund part of the land purchase costs
  • Fund the build of houses and flats
  • Improve the developer’s cash flow
  • Free the developer’s cash so that additional residential developments can be funded

Stretch Senior loans overcome certain barriers that are experienced in high street lending. In particular, high street lending from banks is typically restricted to 50 percent of gross development value. In comparison, principal lenders can arrange finance at 65 percent of the gross development loan with 80 percent loan to cost, plus interest rolled up on top.

A Stretch Senior residential property development loan is typically a loan of between £500,000 and £10 million. This short term debt will be structured over 12 to 30 months and loans are 100 percent secured on the development property.

In order to be approved for Stretch Senior finance, planning must be in place and the project must be undertaken by an experienced developer or house builder.

Mezzanine Finance

Mezzanine Finance, often referred to as a ‘mezz loan’ or ‘mezzanine loan’, is a second charge debt that can be used to:

  • Top up the developer’s level of finance
  • Improve the developer’s cash flow
  • Free the developer’s cash in order to purchase additional land or to begin a second project

Mezzanine Finance can be used for the development of flats, conversions, new builds, office to residential and properties with a commercial aspect. A mezz loan is typically of a value between £250,000 to £3 million with the debt structured over 12 to 24 months.

A principal lender can arrange finance at up to 90 percent loan to cost with 70 percent loan to gross development finance. The development site must have outline planning in place, in order for financing to be approved.

Property Development Finance costs

Property developers should consider and be aware of the associated financing costs. These costs may include an arrangement fee, exit fee, interest rate, valuation, monitoring surveying fees and a non-utilisation fee.