The key issue for the post credit crunch UK real estate market is liquidity. Traditional property lenders have largely kept faith with distressed borrowers whilst vacating the higher risk junior debt space. Current market dynamics are appealing to innovative new lenders, attracted by the high returns available from real estate mezzanine financing. However, from a tax perspective, higher risk property funding presents a number of technical issues for borrowers that may be expecting tax relief for financing expense incurred. Navigating the distinction between debt and equity, as well as determining arm’s-length pricing in an environment lacking perfect information, can be of paramount importance.
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