Up until the last recession, developers would normally structure their debt with traditional Senior banks like Natwest, and if they needed higher leverage they would add mezzanine finance to sit behind the senior loan.
Since 2008, the traditional senior lenders have either retrenched from the market or become a lot more conservative on allowing the developer to structure mezzanine behind them. This has resulted in the emergence of new lenders who have the ability to provide whole loans, or ‘stretched facilities’.
These funders, who typically have mandates from institutional funds or family offices, have now gained a sizable market share and are becoming the market norm. These lenders will lend up to 90% of total cost at a rate of around 10-12%. If you compare that to the traditional method and calculate the blended rate of the senior loan, usually at 6% and the mezzanine loan at 16%, the blended rate is in the single digits.
We can clearly see that the market is now swinging back in favour of the traditional way of structuring and as the market becomes more competitive, rate compression is likely to
happen. On top of this, the market is seeing more willingness from senior lenders to accept mezzanine to sit behind them.
The most important part of the deal is not always the price; it is about completing the deal in a timely and cost-sensitive manner. Traditional structuring does throw in other problems that you should consider. Inter-credit deeds must be negotiated and agreed between the senior and mezzanine lenders, and on top of this your professional fees, such as for lawyers and surveyors, will be a lot higher due to two lenders being involved.
A development project very rarely runs on time. If a time extension is needed, the developer will have to negotiate with two lending parties rather than having one port of call.
To summarise, it is a positive sign that the market is seeing increased growth in development lenders and it is great to see that the traditional method of structuring debt deals is returning and expanding. Stretched lending is a good way to simplify a deal and save on fees, but most of the time will not be as cheap.
For developers, any increase in financing options available is always a positive sign, but as the market expands for both stretched and traditional financing there will be more emphasis on the broker and their quality of advice. If advised correctly, the developer can maximise their financial return by using the traditional method.
