When real estate developers wish to secure supplementary financing to fuel up growth for their property projects, one of the viable solutions they can consider is mezzanine loan financing.
But with so little information about this topic, it’s not always easy to understand what it is, how it works, and what benefits it provides the borrower.
In this article, we will shed some light on this topic so Malaysian property developers can make better decisions about their commercial real estate financing.
What is a mezzanine loan?
Mezzanine loan is a form of financing that combines both equity and debt financing qualities. This unique structure presents many benefits to the borrower. It is particularly useful when companies need to quickly raise funds to boost their project development.
What are the benefits?
When it comes to financing options, financial lenders will usually support Malaysian commercial property developers up to a maximum of 60% of the property value and not more. With mezzanine financing, commercial property developers can obtain capital to make up for the shortfall of 40% and continue to sustain the project.
Another benefit of mezzanine financing is that it is a way for commercial property developers to secure large amounts of financing rather quickly. These loans do not need security and borrowers who have a good record of successful investments can use this to their advantage.
Borrowers who go the route of mezzanine financing also find it advantageous to them because the interest is tax deductible.
How does it work?
To paint a clearer picture of mezzanine financing, here’s an example that illustrates how it works.
ABC Bank offers a mezzanine loan to DEF Company, a commercial property developer in Malaysia. DEF Company utilises this financing to pay off higher interest rates on an existing loan. In addition, the mezzanine financing provides DEF Company with additional working capital to sustain its business, allowing it to expand its services. ABC Bank collects interest payments from DEF Company, and in the case of financing default, will be able to convert the mezzanine financing into equity stocks in DEF Company.