The path to 75% GDV property funding in the UK

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Are you a property developer exploring a new venture? We understand that financing these projects often requires creative, strategic funding solutions. For example, one of the most popular ways to achieve up to 75% of Gross Development Value (GDV) funding is by combining senior debt with mezzanine finance. Solutions such as this have quickly become a cornerstone of the UK’s property development financing market.

In this article CEO of LDN Finance, Chris Oatway, is here to help us explore how a complex funding structure such as this works, including its advantages and disadvantages.

Understanding the structure

Typically, senior debt finance forms the foundation of development finance. This is usually around 60-65% of GDV, however, some development projects require more capital to make their projects viable. This is where mezzanine, or ‘mezz’ finance, comes into play.

Mezzanine finance forms part of the capital sack, sitting between senior debt and equity. Effectively, it’s a second charge loan, bridging the gap between a developer's own equity contribution and senior debt finance. By combining the finance, developers are able to reach that crucial 75% GDV threshold, which in turn reduces the amount of personal capital they may need to put forward for each project.

How it works in practice

For example, on a recent development with a GDV of £9,535,000:

• Senior debt secured £6,204,000 Gross loan (65% GDV)
• Mezzanine finance secured a gross loan off £1,239,000 (gross loan 13% of GDV)
• Total LTGDV: 78%
• LTC: 96%
• Developer equity contribution: £320,000

Structuring the finance in this way enables developers to undertake multiple or larger developments simultaneously, stretching the available equity beyond what was initially thought.

What are the advantages of senior debt with mezzanine finance?

Here are three advantages of combining senior debt with mezzanine finance:

1. Increased Leverage: The most obvious benefit is the developer’s ability to secure the additional funding required to achieve 75% GDV, while committing less personal capital to the project. In turn, increasing the leverage can significantly strengthen returns on equity when projects succeed at exit.

2. Flexible Project Planning: By accessing more capital, developers have improved flexibility in project planning and execution, often resulting in high quality finishes, better construction methods, or simply the ability to pay unforeseen costs without needing to compromise on the project’s final goal.

3. Expanding a portfolio: With reduced equity in each project, developers can spread capital across multiple projects simultaneously, thereby building a diverse portfolio that could potentially accelerate business growth faster.

What challenges are there to consider?

1. Higher costs: Typically, mezzanine finance has higher interest rates than senior debt, ranging from 18% to 24% pa. To prepare for this, the blended cost of capital for senior debt and mezzanine finance combined must be factored into project calculations.

2. Complex intercreditor relationships: Using multiple lenders often requires meticulous structuring of the legal relationships between each party. Having a senior and mezzanine lender funding together often means additional documentation, so we generally focus on lenders that have worked with each other previously to keep costs to a minimum.

3. Strict covenants and oversight: More parties and higher leverage can sometimes limit flexibility during the development process.

The advantage of using a broker

The complexities of development finance can sometimes be challenging to navigate. That’s why using a specialist broker – with their expert knowledge and experience of structuring this type of finance - has become so important for developers.

The knowledge of market-leading brokers has its advantages:

1. Access to exclusive market products: Expert brokers hold relationships with numerous senior and mezzanine lenders, many of whom don't work directly with developers. Not only are brokers then able to access exclusive products, but wider market access can improve a developer’s chances of securing suitable terms.

2. Tap into structural expertise: Specialist brokers understand the nuances of structuring deals to satisfy both the senior and mezzanine lenders, thereby creating applications that balance risk and reward.

3. Efficiency of timing: Securing multiple funding vehicles can be very time-consuming. Brokers can streamline this process managing negotiations and their complexities, leaving developers to focus on their business.

4. Enhanced Negotiation: Brokers bringing multiple deals to a lender’s table have significant negotiating power when compared to an individual developer approaching directly.

For developers seeking to maximise their development potential through 75% GDV funding, the combination of senior debt and mezzanine finance represents a powerful tool. While this structure comes with complexities and costs, the attractive strategic advantages often outweigh these considerations, particularly when navigated with the support of an experienced broker who can optimise the arrangement for the specific needs of each development project.