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Mezzanine Financing: Tools, Applications and Total Performance by Luc Nijs

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7

Real Estate Projects and Mezzanine Finance

In reality, a big chunk of what has been discussed in the context of project finance and mezzanine products is valid in the context of real estate finance as well. At least as long as it is directly linked to the particularities which are the consequence of a project's creditworthiness and its exclusive dependence on the cash flows of the project company. The equity owners are the sponsors of the project, potentially complemented with eternal equity investors.

We will therefore build on the principles previously discussed and focus more on the real estate-specific features of a deal. However, the systemic approach will definitely feel familiar after having reviewed the project finance chapter.

Let's start with an example:

You are trying to model the distribution of cash flows from a real estate investment. It is essentially a series of cash flows after payment of debt service from month 0 (closing) to month 36. The real estate project has two investors, the Institutional Investor and the Developer. In this case, the Institutional Investor contributes 90% of the required project equity and the Developer contributes the remaining 10%. The cash flow is distributed according to a set of parameters specifying cash flow percentage allocations and IRR targets, known as the cash flow waterfall. As with all for-sale development deals, the early cash flows are negative and then turn positive as unit sales occur. In more recent times, lenders ...

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