Mezzanine finance can offer favourable risk/reward opportunities for investors, but we do not embrace providing mezzanine finance in all situations. While the cost of Mezzanine Debt may seem expensive, in comparison to the overall cost of funds or the blended rate, the total financing costs are not significantly increased. Further, many mezzanine financiers will provide capital only if the entire debt capital structure--both first mortgage and mezzanine piece--can be refinanced in two or three years. All types of subordinated financing will require an inter-creditor agreement between the senior and subordinate lenders. We identify the primary situations in which mezzanine finance can play a role and discuss the risks and implications of extending mezzanine finance. The mezzanine financing piece serves as gap or supplemental equity, even though it may be structured as a second mortgage. In addition, the $1.3 trillion in subset of commercial and multifamily mortgages referenced above most likely includes loans on properties not appropriate for mezzanine finance, Ag, small and non-traditional commercial properties. The $10-75 million first mortgage market is the most competitive allowing mezzanine lenders to leverage off of low cost/higher leverage first mortgage debt to generate mezzanine returns. The property developer is able to keep his equity free for other projects A cheaper means of securing financing than typical equity / AV arrangement Allows the developer to diversify his risk and maximize his equity by potentially investing in other projects simultaneously Gives the developer the ability to secure additional financing without involving other partners who will then be entitled to a share of the project’s profits Mezzanine finance is typically processed at a faster rate than other equity facilities, meaning that the developer can get the funds he needs without delay Mezzanine finance is perhaps the most cost effective and beneficial means of raising additional equity for a property development project. Mezzanine financing or, perhaps more appropriately, mezzanine capital fills the gap between the first mortgage financing, which usually has a loan-to-value ratio of forty to seventy-five percent, and the equity participation of the principals of the borrower, which is usually no more than ten percent of the cost of the project. For example, filling the financing gap to bring the property to an 80-90% ITV, often called participating debt or preferred equity, typically includes a fixed-income component and a small participation or exit fee. This paper identifies situations where mezzanine finance may be a reasonable strategy, pointing out important components of deal structure and potential returns, and also describing the risks that mezzanine providers must acknowledge and underwrite.
Most end with balloon payments. Recently, there have been the addition of provisions related to the performance of the business. Some of these provisions include pure debt, notes contingent on performance and even equity participation. Risk structures can also be changed to include earn outs. this is where key players on the sell side are incentivized to stay on after the transition. Pros and Cons Seller is disadvantaged as they cannot exit or receive full settlement after the transition.