IMA

Mezzanine Debt

Banks will typically fund between 65% and 80% of the total cost of a project with the balance funded by developer equity. Mezzanine debt is a second layer of debt and depending on individual project fundamentals, can be a partial or total substitute for equity. Mezzanine debt is considered riskier than bank or senior debt but less risky than direct equity participation. The diagram below demonstrates a capital structure for a project using mezzanine debt.

Mezzanine debt provides a fixed return, which is compounded (usually monthly) and paid at the end of the project only after the bank or senior lender has been repaid or refinanced. Investor returns for IMA mezzanine facilities vary, but typically range between 16% and 23% p.a. compounding monthly in arrears. Projects are usually 12-15 months in duration. Factors that influence investor returns include: -

• The level of equity contributed by the developer;
• The track record of the developer;
• The security provided to IMA;
• Presales and or preleasing commitments; and
• The project risks and the extent to which they can be mitigated.

In most instances investors pay no fees to IMA as we generally receive our fees from the developer.

Equity

Equity is generally raised for longer term projects (two – five years) where capital is required to ‘work up’ a project concept or where some or all of the traditional development risks cannot be appropriately mitigated at the time of providing the funds.

Equity carries a higher risk profile than mezzanine debt but also carries a potentially higher return. Transactions are usually structured to allow the investor to share in the development profit of a project with target internal rates of return of about 30%. In some instances, investors pay fees to IMA to participate in equity transactions, usually in the form of a performance fee once an agreed benchmark return is exceeded.


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