New breed fills finance company void
A new breed of mezzanine funders are becoming increasingly active in the property development market as they attempt to fill a void left by the demise of finance companies.
One of the mezzanine funders most aggressively chasing business is the Manson family's New Zealand Mortgages and Securities.
Privately owned Manson TCLM (TCLM stands for Ted Manson and his sons Culum, Luke and Mac) is probably this country most successful vertically integrated property business, acting as investors, developers, builders and funders of many of its projects.
Unusually for property developers, Manson provides very little business for the banks, funding most of its projects from the family's considerable private resources.
One of the few exceptions is Telecom's $250 million headquarters in Auckland's CBD, which Manson developed with the aid of outside funding.
But its other projects, which are typically worth tens of millions of dollars each, are usually mortgage free.
Mezzanine funders play a crucial role in property development by providing developers with the riskiest part of their finance package to top up the partial funding provided by prime lenders such as a banks.
If a developer required a $50 million finance package to undertake a project, the developer might have $7.5m in equity and a bank might be prepared to lend $35m, structured as a first mortgage.
The developer would then turn to a mezzanine funder to provide the additional $7.5m the project needed, which would probably be structured as a second mortgage, which is why mezzanine funding is sometimes referred to as second-tier funding.
Although the mezzanine funder may only be providing 15 per cent of a project's total finance requirements, their role is critical because the finance packages are usually structured so that the developer draws down the mezzanine funder's loan first to get the project under way, and then starts using the prime lender's money.
That means the mezzanine's funders loan is at greatest risk if things go wrong, because not only is its money used first, it ranks behind the bank or other prime lender in terms of security.
Instead of sourcing money from the general public as the finance companies used to, today's mezzanine funders are generally sourcing their money from wealthy individuals and families or the wholesale money market (institutions), and applying it to specific projects.
So while investors in the former finance companies would probably have had no idea about which projects their money was being used to finance, now they know exactly which development they are funding, and can take a close interest in its progress if they wish to.
The profits can also be good, with most mezzanine funders charging 15-22 per cent interest at the moment.
With new developments few and far between over the past few years, the need for mezzanine funding has been minimal. But with the market starting to gain some momentum, such funders are out and about talking deals again.
Some, like Auckland-based Capital Group, have been in the market for many years and have seen the highs and lows before.
Others, like Sydney-based Winton Partners, are relative newcomers to the New Zealand market.
Winton purchased a good sized chink of Bank of Scotland International's New Zealand loans, which it's used as a base to set up shop here and open an office in Auckland.
Manson, meanwhile, is mainly involved in commercial property, but sees big opportunities in the Auckland housing market. It wants a slice, but as a financier rather than as a developer or builder.
In that cause, the Mansons set up NZ Mortgages and Securities in December as a joint venture with the company's lending director James Kellow, to lend money on property developments.
Initially, Kellow has $100m of the Mansons' money to play with but he hints there could be more to come.
He has already signed his first deal, providing mezzanine funding on the 500-unit Sugartree apartment complex about to get under way on the Auckland CBD's Nelson St ridge.
He is considering funding a major greenfields subdivision project as well.
Both are typical of the types of projects NZ Mortgages and Securities wants to be involved in, Kellow said.
They would look at providing funding for up to two years and would consider being either the prime or mezzanine funder, he said.
And the company can be flexible in how it structures its loans.
It could provide money to allow construction to start at a much lower level of pre-sales (when properties are sold off the plans) than would normally be required, Kellow said.
Usually sales increased markedly once construction is under way, so when the required number of sales was achieved, the bank could then step up and take over the funding arrangements, allowing NZ Mortgages and Securities to exit the project, releasing funds for the next one.
Kellow said he didn't believe there was a shortage of residential land in Auckland, just of financiers and developers willing to build on it.
And he didn't believe there would be any problem getting the banks to provide prime funding for new residential developments.
"The banks are very bullish at the moment. They are looking for deals," he said.
- © Fairfax NZ News
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