Mezzanine loan and bridge financing – how it works.

An interesting way to invest small amounts for short periods of time at high interest

Buying a single piece of real estate is far from the only way to make money on square footage. In this piece, let’s talk about mezzanine loans. How does the mechanism of financing development projects work, why do private investors lend money to foreign companies, and what kind of profitability can be expected here?

What is mezzanine financing?

The difference between bank loans, mezzanine and bridge financing.

Mezzanine financing is a supplemental loan. A developer uses this tool to raise funds over and above a bank loan, to increase the amount available or to replace equity.

As the term itself suggests, it is something “in the middle.” In this case, the middle ground is between the bank (senior) loan and the developer’s own capital.

First, the developer goes to the bank, which provides 50-70% of the total cost.

If the developer does not want to contribute all of the remaining funds himself, he can take it as a “mezzanine” loan. This loan will have a so-called second lien on the property, meaning it will be second in line after the bank for repayment.

Mezzanine loans are different in that the loan body itself and the interest on it are almost always paid at the end of the project.

Finally, there is another type of loan – bridge short-term financing. In this case, the developer does not apply to the bank, but asks for funds from investors and gives them a priority right of pledge on the object. Such borrowing is relevant for short-term projects lasting 9-12 months. After all, banks are often unwilling to lend for up to two years, and the developers are not always profitable to attract them, because the decision will be too long. Bridge loans are used at the start of the project to buy a plot or start construction, and then refinanced in a bank.

Investors in Russia often think that borrowing money abroad is very cheap – at 2% a year. This is not true everywhere. In the UK, bank loans for construction are given at rates of 5 to 10%, depending on the reputation of the developer, the volume of his business and other parameters. Moreover, the bank charges such a percentage, having the right of first lien on the object, so the rates on mezzanine loans with less protection will be even higher.

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