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The Funding Matrix
SENIOR DEBT FUNDING (Security being a first charge)
- This goes to the organisation providing the greatest level of contribution. It would generally be a High Street or Off High Street organisation.
MEZZANINE FUNDING (Security being a second charge)
- Is generally the difference between the senior debt, the developer's contribution and the value required for development (top slice) – to make up the 100%.
- We do have mezzanine funders who will lend the balance with no contribution required by the developer. They will normally approach the lending as an equity partner and as such will want a percentage of the profit, BUT we view them as ENABLERS – it allows for profit rather than none.
DEVELOPER CONTRIBUTION
- The larger the contribution from the developer, the better the interest rate on other borrowings. This is because the lenders see a higher level of commitment (commonly referred to as hurt money) and therefore less risk for them.
- The developer is looking for the best return on his capital. However, he may be "cashed
out" – in otherwords highly geared in other projects with no cash in the bank. This means
you need to take a commercial view on the project: -
- Do it with an equity partner, but earn less profit.
- Sell (or flip) the site onto another developer for a small profit.
- Don't do the development at all.