Flashcards in How mezzanine and equity finance might be priced Deck (7)
What is mezzanine financing?
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%
What are the associated costs for mezzanine financing?
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
What factors will effect the cost of mezzanine financing?
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
What is equity financing?
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
What are the associated costs for equity financing?
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
What is the cost of equity formula?
COE = (dividends per share / current market value of stock) + growth rate of dividends