Mezzanine Debt

Preferential Equity

Joint Venture

What is it?

2nd mortgage behind the Senior Debt (the 1 st mortgagee)

Hybrid of debt and equity, taking on characteristics of either or both, but being in preference to the Ordinary Equity (e.g the shareholders)

Usually “ordinary equity” on a “shoulder to shoulder” basis, i.e. you and I put our money in together, we win and lose together

How much does it cost?

Usually a fixed interest rate anywhere between 15% and 30%

Can vary significantly, ranging from a fixed interest rate, to a profit share, or a blend of both

Share of profit, relative to each party’s shareholding

What security is taken?

2nd mortgage

Other usual securities similar to the 1st mortgagee’s

Can vary significantly

Usually just the JV agreement

Common Pros

  • Less of your own equity = diversification across multiple projects and better Return on Equity (less profit per project, but more profit overall)
  • Potentially able to start a project sooner by having less Senior Debt (but then maybe not, if the lender wants the pre-sales!)
  • Using a quality partner can deliver tangible value through their experience and capability

Specific Pros

Usually the cheapest capital compared to Pref & JV

Banks can be more ok with Pref than Mezz

Will often lend to a higher LVR than Mezz

Real equity preferred by Banks

Project delays don’t eat away profits

Share the risk with another party

Common Cons

High interest rates brought in too early can eat away your equity

Swimming with [loan-]sharks can be deadly

Specific Cons

Banks often don’t like Mezz, if they do they will usually cap the LVR

Some non-banks also don’t like it (but some don’t care)

Securities can give the lender wide ranging powers, including “take-over rights”

Usually THE most expensive capital

Have to share decisions with someone else