Senior Debt

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What is Senior Debt? 

Senior debt is normally the first part of debt in the capital stack and typically ranges up to 65% loan to GDV or 80% of loan to overall cost. A senior debt facility will also normally be the cheapest part of the capital stack. 

Why is Senior Debt Used? 

Essentially senior debt is used to fund the acquisition and build of development projects. This is a borrowing vehicle that allows developers to leverage against the potential final value of the project and borrow the money on a drawdown facility. Even if you have enough cash, an experienced developer will be able to then use their cash on multiple projects which can increase return on cash invested dramatically. 

A quick example. 

Purchase price of land – £1,000,000

Total Build cost including fees – £2,000,000

Total project cost – £3,000,000

GDV – £4,000,000

Total cash contribution – £3,000,0000

Profit – £1,000,000

Total return on cash invested – 33%

Essentially you have used £3,000,000 to generate £1,000,000

Now the example with using 20% cash contribution of total costs 

Purchase price of land – £1,000,000

Total Build cost including fees – £2,000,000

Total project cost – £3,000,000

GDV – £4,000,000

Total cash contribution – £600,000

Borrowed amount – £2,400,000

Assumed cost of finance for illustration 10% – £240,000

Total Project cost including finance costs – £3,240,000

Profit – £760,000 

Total return on cash invested – 126% 

Essentially you have generated £760,000 profit from investing £600,000. This leaves you with another £2,400,000 in your pocket to take on other projects. If you make the same return on the other projects your £3,000,000 becomes £6,780,000

What does a senior debt facility cost? 

Each deal is individually priced given the risk of the development. Typically they range from 4.5% a year up to 10% a year. It is extremely important to consider the total cost of facilities. Lenders are quite clever in how they compound their interest and their fees. Sometimes a better interest rate per annum doesn’t always materialise the cheapest overall senior debt facility. 

How Can Mesa Financial Help? 

As with most financial products in the lending market, senior debt facilities are extremely complex. Banks take advantage of this and will always pitch as high as they can in terms of fees and pricing structures. Having a good adviser on your side through this negotiation can be hugely beneficial and will make sure you are getting the correctly structured facility for your business.