Filling The Gap

Understanding the financing layer between a project’s bank debt and ordinary equity

The biggest benefit of mezzanine finance is that it reduces the amount of equity required in a property transaction. As equity is an expensive form of capital, it is most cost effective to create a capital structure that obtains the maximum non-equity funding, offers the lowest cost of capital, and maximises return on equity. To achieve this it is common to add to the project a layer of mezzanine finance. This is commonly either subordinated debt, which is secured by a second mortgage over which the bank has priority, or preferred equity in one of a variety of structures unsecured behind the bank but ranking ahead of the ordinary equity.

During the last five years Dorado Property has provided capital to over 80 projects nationally across the development of apartments, land subdivisions and offices.

Developers who have used Dorado Property’s mezzanine finance have referred to a number of benefits including:

• Flexibility to determine their level of equity,
• Enhancement of equity returns,
• Deployment of released equity to other transactions,
• Tax deductible interest,
• Short time required to introduce mezzanine funds compared to raising equity,
• Can provide certainty to fund an unexpected gap from a reduction in bank debt or equity,
• Development control is retained when compared to working with other joint venture partners, and
• It is possible to introduce whilst a project is underway to release committed equity.

Given the property focus and the team’s extensive experience with developers and banks, Dorado Property is an excellent resource to discuss how to optimise the capital structure on your developments.

Tim Moore, Director, Dorado Property [email protected] 0418 924 811.

To learn more about the differences in funding as it relates to multi-unit residential developments, register for the Multi Unit Development Conference now to hear Tim discuss it further.