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As more money lows into real- st t - t d inv stm nts, n w nd

innov tiv n ncing p oducts o -owing. In comm ci st t , m zz ninn ncing continu s to b hot topic.

So wh t x ct y is m zz nin in ncing,nyw y?

o b gin nsw ing this qu stion, w mustook t th ch ct istics th t m k up m z-z nin n ncing.

What it isBy d nition, m zz nin o n is hyb id o d bt nd quity, g n y subo din t to nys nio d bt. It is o t n us d to und xp ndingcomp ni s. Giv n th o n’s subo din t posi-tion, th nd usu y c iv s high coupont th n wh t wou d b on th s nio d bt.

M zz nin n ncing usu y cont ins con- v tib tu , which ows th nd to -iz ny g ins ssoci t d with p oj ct’s succ ss,which cou d u th inc s th tot yi d. Tnd so c n switch to own ship o quity

int st in th comp ny i th o n is not p idby th g d-upon d t .

his is wh t m k s m zz nin in ncingtt ctiv to inv sto s nd nd s — it o s th

yi d o n quity inv stm nt, with th p ot c-tion o b ing in c dito position.

So how c n m zz nin i n ncing b n it you c i nts? Giv n th continu d tight ning o b nks nd s nio nd s with sp ct to th io n to v u s (L Vs), bo ow s o c d toput mo c pit into p oj cts. M ny comm cibo ow s, inc uding d v op s nd individuinv sto s, ooking to us s much v gs possib , k ping th m iquid nd hop u y,m ximizing tu ns.

D p nding on th typ o p oj ct th bo ow

Sorting Out Mezzanine FinancingKnow the ingredients of this complex commercial product

is g tting into, how v , high v g m y notw ys b th b st w y to st uctu th d . It

m y c us n g tiv c sh ow o t up most o th pot nti p o ts.

M zz nin n ncing c n b p ovid d to thbo ow quick y, with itt o no co t ndwith minim du di ig nc . B c us this typo unding c n b v u b too o inv sto snd d v op s, it is p oduct you shou d bmi i with nd th t you shou d b com o t-b xp ining to pot nti c i nts.

A though by its n tu m zz nin n ncing

h s no s t t ms o st uctu s, th somcommon d t ms us d in th s st tt ns ctions.

Straight debt instrumenthis is th most-common in ncing o st -

bi iz d p op ti s, nd it is so t h si st tound st nd. T m zz nin nd t k s sub-o din t , o junio , i n position, usu y to combin d o n to v u (CL V) o s high s 85p c nt.

In this sc n io, th nd h s no quityp ticip tion in th p oj ct’s c sh ow ndno s y in th p oj ct m n g m nt. D p nd-ing on th CL V, p oj ct typ nd bo owst ngth, yi ds typic y within th9-p c nt to 13-p c nt ng , with t msm tching thos o th s nio not .

Continued …

ByJoseph Bonora, CEO, Joseph Scott Financial

Joseph Bonora is the CEO of Joseph Scott Financial, a commercial and residential realestate lender. Specializing in acquisition and development, as well as in value-add transac-tions, Joseph Scott Financial provides debt-and-equity-placement, strategic-advisory andreal estate investment-banking services. To reach Bonora, e-mail jbonora@josephscott.com or call (813) 968-5002. For more information, visitwww.josephscott.com.

8/3/2019 Scotsman Guide Article_Mezzanine Loans[1]

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Reprinted From Scotsman Guide Commercial Edition and scotsmanguide.com, February 2007

Mezzanine Financing… Continued

Participation noteWh n bo ow s s k high v g nd wi ing to giv up som o th c sh ow o quityo it, m zz nin nd s c n st uctu th o ns p ticip ting d bt inst um nt, which is d bt/ quity hyb id, o so ts. By doing this, bo -ow s c n usu y g t s much s 90-p c nt

CL V, but th y do giv up som pot nti o good p oj ct.

L nd s consid th high isk wh n c cu-ting th coupon t nd p c nt g o quity

th y wi qu st om th bo ow . G n y,th y wi qui g t yi d. On st nd d,st bi iz d t ns ction, th m zz nin ndwi ook o 15-p c nt to 18-p c nt ovint n t o tu n but m y qui hightu n o t ns ctions it d ms isk i .

Pre erred equityOn st p shy o pu quity p y, th p d-quity st uctu giv s th m zz nin nd

som cont o ov th p oj ct, ong with g t quity position. T bo ow nd ndusu y nt into p tn ship o joint-v ntug m nt, which d n s th o ch p ty

wi p y, th quity own ship o ch nd nyoth t ms.

A though m ny bo ow s do not ik givingup cont o o th i p oj cts, most wi ing toi it m ns th y don’t h v to commit subst ntic pit to th p oj ct.

On th oth sid o th qu tion, th m z-z nin nd njoys mo cont o , high

ov yi d nd th bi ity to st p in nd t kov th p op ty in th v nt o d u t. Tisis in xch ng o th nd ssuming g tisk with th h igh CL V nd imit d bo owc pit .

Uses or mezzanine fnanceInv sto s onc us d m zz nin n ncing mostxc usiv y o co po t - n nc d s. od y,th y h v ound m ny us s o it in st t .St bi iz d p op ti s, v u - dds nd n w d v -opm nt th th m in typ s o m zz nin

st t t ns ctions.

I h ca ab z d p p , h z-za p c u ua a a gh d b u-, ub d a h , h

qu c p . T h c a da gh a d p zza f a c g, a

c a h a a u k a d h a - b a d d u d a d.M zz nin n ncing wi on y wo k i th

st bi iz d p op ty g n t s nough c sh ow

to cov th d bt s vic o th st mo tg gnd th m zz nin pi c , ong with th op -ting xp ns s. And it must p ovid th ownwith tu n.

V u - dd, o nonst bi iz d p op ti s, p op ti s wh c sh ow is not st bi iz d.Tis cou d b o ny numb o sons — ox mp , wh n p op ty qui s signi c ntimp ov m nts to tt ct n w t n nts ndinc s s t s. A bo ow who h s id n-ti i d pot nti oppo tunity to position p op ty wou d ook to m zz nin nd oth c pit — mo th n wh t th s nio ndwi commit — n d d to c t v u .

T m zz nin nd wi ook c os y t thbo ow s’ nd/o th p oj ct m n g s’ ésuméswh n und w iting th d . h o , it isimpo t nt o both p ti s to h v xp i ncnd xp tis in v u - dd inv stm nts.

D v opm nt d s consid d th iski-st o th s th t ns ction typ s. As such,

th y th most ch nging to st uctund qui th most du di ig nc by nd s.B c us d v op s, by n tu , ik to us h vyv g on th i p oj cts, m zz nin n ncing

is o t n k y compon nt o th c pit st ck.In d v opm nt d s, m zz nin n ncing

o t n t k s th o m o p d quity thth n st ight d bt. Tis is b c us o two m incto s: th nd ’s n d to chi v high t

o tu n b c us o isk nd th nd ’s d sito p ticip t in th d cision-m king p oc ssnd p oj ct m n g m nt. T nd w nts to dowh t v it c n to p ot ct its inv stm nt.

U tim t y, th v o comp xity v i sb tw n t ns ctions. B sic y, th mo mov-ing p ts t ns ction h s, th mo difcu t it

b com s to st uctu th c pit st ck to inc udm zz nin n ncing.

■ ■ ■

M zz nin n ncing p ys big o in comm -ci st t d s. R m mb , s mo si-d nti o n ofc s mov to comm ci , thw y to st y on st p h d is to duc t you s ,

n s much s you c n nd continu to g ows p o ssion .