real estate projects and mezzanine finance

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1、7RealEstateProjectsandMezzanineFinanceInreality,abigchunkofwhathasbeendiscussedinthecontextofprojectfinanceandmez-zanineproductsisvalidinthecontextofrealestatefinanceaswell.Atleastaslongasitisdirectlylinkedtotheparticularitieswhicharetheconsequenceofaproject’screditwo

2、rthinessanditsexclusivedependenceonthecashflowsoftheprojectcompany.Theequityownersarethesponsorsoftheproject,potentiallycomplementedwitheternalequityinvestors.Wewillthereforebuildontheprinciplespreviouslydiscussedandfocusmoreontherealestate-specificfeaturesofadeal.How

3、ever,thesystemicapproachwilldefinitelyfeelfamiliarafterhavingreviewedtheprojectfinancechapter.Let’sstartwithanexample:Youaretryingtomodelthedistributionofcashflowsfromarealestateinvestment.Itisessen-tiallyaseriesofcashflowsafterpaymentofdebtservicefrommonth0(closing)t

4、omonth36.Therealestateprojecthastwoinvestors,theInstitutionalInvestorandtheDeveloper.Inthiscase,theInstitutionalInvestorcontributes90%oftherequiredprojectequityandtheDevelopercontrib-utestheremaining10%.Thecashflowisdistributedaccordingtoasetofparametersspecifyingcash

5、flowpercentageallocationsandIRRtargets,knownasthecashflowwaterfall.Aswithallfor-saledevelopmentdeals,theearlycashflowsarenegativeandthenturnpositiveasunitsalesoccur.Inmorerecenttimes,lendershavetendedtostepinonlyifthereis50%pre-sold.Theorderofdistributionofthecashflow

6、remainingafterdebtserviceispaidisasfollows(thewaterfall):Bothinvestorsreceivethereturnoftheirinvestedcapitalfromcashflowdistributions.1.Hurdle1(afterthereturnofequitytobothinvestors),theInstitutionalInvestorreceives90%ofthemonthlycashflowsandtheDeveloper10%,proportion

7、altotheirrespectiveoverallequitycontributions,untilbothinvestorsachievea12%IRR(allIRRstobecalculatedfromdealinception/firstdollarinvested).2.Hurdle2,(afterHurdle1issatisfied),theInstitutionalInvestorreceives60%ofthemonthlycashflowsuntiltheInstitutionalInvestorachieves

8、an18%IRR.3.TheFinalSplit(aftersatisfyingHurdle2)allocatesmonthlycashflow50%toeachinvestor.Onanoverallprojectbasis,theDevelop