Mezz is back…tell your friends!
Mezzanine finance is back, for real. We’ve recently closed two mezzanine loans and have seen an uptick in inquiries for this capital type, which for the last few years has remained dormant.
This is an interesting shift in market and perhaps an indicator of where we expect to see activity in real estate debt capital through 2021.
A few quick points/take away to make here:
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- The combination of trading bank senior and junior debt in a development finance stack remains materially more price competitive than non-bank senior only alternatives. Our modelling indicates the savings are around 15%-20% of your borrowing costs. We closed a $20m capital stack recently using bank and mezzanine, which proved $250,000 cheaper than the alternative non-bank senior only solution.
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- A resurging residential market should drive pre-sales and consequently developers back to considering the banking market for debt.
- We are also seeing and closing mezzanine loans over existing investment assets, no doubt helped here with lower debt costs post COVID relieving ICR covenant pressure. Again these stacks are presenting as a cheaper cocktail relative to the non-bank senior only alternative. We recently closed a mezzanine facility up to 78% LVR behind a second-tier bank, effectively equating to a blended rate of 4.16% per annum. This was secured against a portfolio of quality income-generating assets, allowing the client to achieve terms more competitive than a stretched-senior facility from a single non-bank lender.
Further to the above, investor appetite was strong for a mezzanine facility secured against a portfolio of fully leased residential apartments. Also behind a well-known bank, the blended rate amounted to a 4.28% per annum and was structured up to 80% of the in-one-line value.
