How mezzanine and equity finance might be priced

Question 1

What is mezzanine financing?

Answer 1

More complex and hybrid type of finance

Combines elements of debt AND equity - secured against the property

Gives lender right to convert to equity interest in company in case of default, after venture capital companies and other senior lenders are paid

Helps property developers reduce their cash flow requirement, enabling them to finance projects that would normally require a larger capital share

One of highest-risk forms of debt.

Subordinate to pure equity but senior to pure debt

Some of highest returns compared to other debt types, with rates between 12-20% per year, sometimes as high as 30%

Question 2

What are the associated costs for mezzanine financing?

Answer 2

Costs for mezzanine financing;

• Facilities start around 1% per month with 2% facility fee and a 1% exit fee
• Rates vary between lenders, but most Mezz funding = priced on per project basis

Question 3

What factors will effect the cost of mezzanine financing?

Answer 3

Various factors affect the cost, including:
 The experience of the developer
 The size of deposit being invested by the developer
 The location of the development
 The amount being borrowed
 The predicted demand for the finished development

Question 4

What is equity financing?

Answer 4

Process of raising capital through the sale of shares in a company. With equity financing comes an ownership interest for shareholders.

May range from a few thousand dollars raised by an entrepreneur from a private investor to an initial public offering (IPO) on a stock exchange running into the billions

Question 5

What are the associated costs for equity financing?

Answer 5

With equity financing = zero debt (and as a result, no interest expense), but would keep only 75% of your profit (the other 25% being owned by your investor)

Therefore, your personal profit would only be $15,000, or (75% x $20,000)

It is less expensive for you, as the original shareholder of your company, to issue debt as opposed to equity

The cost of equity is the return a company requires to decide if an investment meets capital return requirements

Question 6

What is the cost of equity formula?

Answer 6

COE = (dividends per share / current market value of stock) + growth rate of dividends

Question 7

What is a capital stack and what is the order of priority of payment?

Answer 7

Capital stack = order and priority of payment;
o Senior debt / loan = first priority
o Junior loan / bond = second mortgage and second priority in payments
o Preferred equity =preferred equity is secondary to debt, but senior to all common (or JV) equity.
Typically entitled to force sale of property in the event of non-payment.
o Mezzanine = loose term. Can mean junior or senior debt / equity.