The Lawyer's Lunchbox

Second Mortgage Lending

A not uncommon request we receive is can we arrange second mortgage finance. The borrower often is a developer of a property project looking for “mezzanine” finance. Typically the borrower has a gap that he needs to bridge between the funds available from first mortgagee and the equity or capital contribution by the Borrower. Mezzanine finance is second tier lending. In terms of priority the mezzanine lender stands behind the first secured mortgage and before the equity partner(s). Because of the higher risk involved for the mezz lender the interest rates are a lot higher.

This is specialist lending and not for mums and dads. See Westpoint.

Second mortgage lending for development projects is the most common. If you are chasing high returns, typically 15-30% my advice is DON’T DO IT. Leave it to the professionals. I have seen enough war stories with projects that don’t happen, that take too long, that turn pear shape that just wipes out the project partners capital but also leaves the mezz lender with a serious loss of their capital as well. When you just want to be repaid and are looking to the exit doors, they are shut locked and bolted.

What about second mortgage lending for borrowers who aren’t developers? This is a different proposition, due diligence is paramount and having satisfactory security is the goal. Often I hear, can you draw up a loan agreement and lodge a caveat. No, No & No.

Risk is one thing, losing your capital is another. Here’s a list of pre-conditions.

1. Valuation of the Security
   
2. Obtain financials of the Borrower and in particular their secured borrowings. Are there any unremedied defaults?
   
3. Preparation of Loan Agreement
   
4. Execution of Mortgage
   
5. Deed of Priority with First Mortgagee
   
6. Registration of Second Mortgage
   

Don’t settle for registration of a Caveat. Caveats aren’t security. What you have is an unregistered equitable interest as mortgagee. Caveats don’t give you the power of sale over the security. That’s what a registered mortgage does. The valuation is important and so is getting the Deed of Priority as you will discover the truth of the current secured borrowings and the existence of any defaults.

As for lending to developers, there are a whole set of other rules.

posted by brett hayton @ 7:48 PM