However, the market for alternative finance for real estate is growing and certain products such as bridging, self-construction, development, and even agricultural and mezzanine finance are becoming increasingly available (source: SPF loans). However, the creation of these products has advantages and disadvantages.
While it is good for borrowers who need funds for specific purposes, applying for the wrong loan can result in a rejection and thus a negative rating on the applicant's creditworthiness. This would inevitably affect future applications for any loan.
Loans like bridge finance are also very adaptable and can be used for both business and personal real estate purposes. This also applies to options like international mortgages and auction finance.
However, there are various products that can be included with the loan just for certain business purposes. This includes mezzanine finance, development finance, and stretch senior debt that is either business dependent or requiring part of the business as collateral for the loan itself.
Mezzanine finance combines real estate debt and credit, and corporate capital. It is typically used for much higher risk businesses and is typically used as a second charge loan.
This means that the borrower usually has a different loan; Let's say a mortgage or bridging loan is secured on a property and then takes out a mezzanine loan to increase the amount of capital available. This is especially useful for real estate developers who need to get a deal through faster than they would otherwise.
However, this type of financing assumes that the borrower has a business and may be able to give up a percentage of the company's shares (equity) if necessary.
The lender offers the loan that is secured against part of the property in the developer's portfolio.
There will be a clause in the contractual arrangement whereby if the borrower is unable to repay all or part of the loan, the lender will assume a percentage of the equity of the business, which in these cases tends to be a risky endeavor.
While this is a higher risk business, lenders will only provide credit if the company in question has room and clear potential to generate significant profits as a result of the investment in the credit.
Should the borrower default on the loan, the lender can either sell the shares to repay his losses, or he can keep the equity he has acquired and receive a share of the company's profits as a shareholder.
However, these loans are likely to incur additional costs in the form of legal fees and potential processing fees. The project may also incur additional fees. For example, if the loan is going to be used to convert a property into multiple living spaces, soundproofing tests will be required (source: https://www.rjacoustics.com/) which will incur additional costs that should be considered from the start.
Stretch Senior Debt
Stretch Senior Debt is a unique type of loan, but it is no different from mezzanine finance in that it combines more than one aspect of finance and business. These loans are relevant to businesses that have some level of wealth and cash flow. For example, a company may have large, predictable, and stable cash flow and limited business assets, and therefore may not be able to secure a loan the size of a bridging loan. By balancing the difference between what they are unable to borrow against their assets against their projected cash flow, they may be able to secure a loan of this type.
Alternatively, a company can have a large asset base and limited cash flow. They may not be able to borrow for all of their assets and so may borrow against the forecasted cash flow of the business. Ordinary unsecured cash flow loans cannot offer the same level of investment as secured home loans, and this is one of the main reasons that borrowers tend to stretch senior debt.
In addition, companies seeking this type of investment must combine the two securities. Assets and cash flow to ensure a much larger capital inflow into their business than would otherwise be available to them.
Borrowers must be able to clearly demonstrate to lenders that the risk they are taking is acceptable and that the potential return is realistic.
The lender always requires that the portion of the loan secured by cash flow be paid back first as it offers less security than the portion secured against property or other assets. However, this type of funding is typically included as a first-charge debt, as opposed to mezzanine funding, which is typically a second-charge collateralized loan.