Six key questions that are asked before any mezzanine financing in the real estate sector

Introduction

Mezzanine financing for real estate is increasingly establishing itself as a flexible financing instrument in Switzerland. It bridges the gap between equity and debt capital and offers real estate players the opportunity to implement projects more quickly and efficiently. However, for financing to deliver the desired added value, it needs a clear structure and forward-looking planning.

We therefore systematically examine six key questions for every financing request. These not only help us to develop the right financing structure, but also provide valuable guidance for borrowers. The following explanations focus on mezzanine financing for income-producing properties.

1. What is the intended use?

Mezzanine financing should always serve a clear and meaningful purpose. It is particularly often used for value-enhancing investments in the real estate sector, such as:

• Acquisition of new properties (by far the most common reason)
• Renovation and expansion of existing properties
• Cross-subsidization of new construction projects

Refinancing is also an important area of application, especially if it allows more favorable terms to be achieved or additional liquidity to be released as a safety buffer.

Guiding principle: „A clear intended use is an important prerequisite for ensuring that the financing creates real added value.“

2. What serves as collateral for mezzanine financing?

Unlike traditional bank loans, mezzanine financing is usually subordinated. This means that the mezzanine lender ranks behind the bank in the event of default. Nevertheless, collateral is also agreed in the mezzanine segment in order to reduce risk and balance the interests of both parties.

Typical forms of collateral are:

• Subordinated real estate liens on the financed property
• Assignment of receivables or rental income
• Pledging of company shares
• Personal guarantees from the owners

The scope of the collateral depends on the project, the capital structure, the creditworthiness of the borrower, and, fundamentally, the risk appetite of the investor. It is crucial that the collateral is transparent and proportionate - sufficient to manage the risk, but not so restrictive that entrepreneurial flexibility is lost.

Guiding principle: „High-quality collateral facilitates both the financing process and the terms of the mezzanine loan.“

3. How much financing should be sought?

It is crucial for borrowers not to focus on the maximum possible loan amount, but rather on the targeted use of the funds. Precise planning helps to use the financing efficiently and ensure the profitability of the project. In the case of mezzanine financing for existing properties, it is also possible to increase the financing amount after a certain period of time and following a prior review, provided that certain criteria are met.

Guiding principle: „As much as necessary, as little as possible.“

4. Over what period of time is the capital needed?

Realistic term planning is essential in order to be able to coordinate liquidity requirements over time. Typically, term planning is strongly influenced by the planned exit for the financing (see below). We deliberately work with buffers and offer extension options that create additional flexibility if necessary. Due to the higher financing costs for mezzanine capital, it makes sense to only use it for as long as it can be used in a capital-efficient manner.

Guiding principle: „As short as possible, as long as necessary.“

5. What exit or refinancing strategies are planned?

A clear exit plan is just as important as the use of capital. Typical scenarios are:

• Sale of the property (e.g., at a more attractive sale price than when the mezzanine financing was taken out)
• Repayment from project profits or ongoing cash flows
• Refinancing via banks by increasing existing mortgages after value increase

Guiding principle: „The more clearly the repayment strategy is defined, the easier it is to structure a mezzanine loan.“

6. When is the loan needed?

Reviewing financing - including regulatory requirements such as Know Your Customer (KYC) - takes time. We therefore recommend submitting financing requests for real estate projects as early as possible (i.e., several weeks before the capital is needed). This creates planning security and enables a thorough review.

Guiding principle: „Plan early to give financing partners sufficient time for a thorough review.“

Practical example for existing real estate

ABC Real Estate AG already holds a diversified portfolio of residential and commercial properties and is carrying out further project developments. An opportunity has now arisen to acquire an attractive property that has come onto the market at short notice. The purchase serves to strategically expand the existing portfolio and is intended to strengthen the company's long-term value and earnings base. Most of ABC Real Estate AG's own funds are already tied up in other properties and real estate projects. The property is valued at CHF 20 million and the bank is prepared to lend 60% of the property value. ABC Real Estate AG is only able to provide own funds amounting to 20% of the property value at short notice.

To take advantage of this opportunity, the answers to the key questions are as follows:

• Intended use: Strategic expansion of the real estate portfolio through the purchase of a property that is available at short notice.
• Collateral: A subordinated mortgage note on the property to be acquired serves as collateral for the mezzanine loan.
• Financing amount: ABC Real Estate AG has CHF 4 million in available equity. The bank is providing CHF 12 million. This means that CHF 4 million in mezzanine capital can be raised, corresponding to the shortfall in equity up to a maximum loan-to-value ratio of 80% of the property value (see also our blog article Private Real Estate Debt: An attractive opportunity for institutional investors).
• Term: 12 months with an option to extend until the current real estate projects can be completed and sold.
• Exit: Sale of current real estate projects. The cash flow from this replaces the mezzanine capital.
• Timing: Immediate application for short-term real estate purchase.

The example shows that those who can clearly answer the six questions meet the minimum requirements for successful financing.

Conclusion: Added value through clear structure

Mezzanine financing for real estate in Switzerland only realises its full value with clear planning and structured implementation. Clarifying the answers to these six questions at an early stage - even in the event that short-term purchase opportunities may arise - lays the foundation for successful financing.

As a private credit boutique, we support our clients in structuring their financing solutions - with experience, flexibility, and a clear focus on sustainable project success.

Your next step

Are you planning a purchase or a real estate project and would like to check whether mezzanine financing is the right solution? Contact us.

Disclaimer
This commentary is provided for informational purposes only and does not constitute an offer or solicitation to buy or sell any securities or financial instruments. The information contained herein is not intended to provide investment, legal, or tax advice, and should not be relied upon in making any investment decisions. Investing in securities involves risks, including the potential loss of principal. Past performance is not indicative of future results. Before making any investment decisions, investors should carefully consider their own investment objectives, risk tolerance, and financial situation. The views and opinions expressed in this document are those of the author(s) and do not necessarily reflect the views of Artemon Capital Partners. Artemon Capital Partners does not guarantee the accuracy or completeness of the information provided herein, and disclaims any liability for any errors or omissions. Investors are advised to consult with their financial advisor or other qualified professionals before making any investment decisions.