Equity and Mezzanine financing are complicated and is usually arranged in combination with lower risk conventional senior debt. As a result, mezzanine and equity lending require creativity and experience at structuring complex loan proposals. The extensive experience of Venture Financial Ltd. and its Principal in arranging these types of loans will help our clients to obtain and close their transactions.
For more details regarding the structure and the intricacies of these types of loans our loan specialists will be pleased to meet with any Borrower/Developer that are interested in these types of borrowing/Joint Ventures.
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Equity Loans
Equity Loans (Equity Participation Deals) is a joint venture arrangement in which the equity lender/investor will provide a disproportionate amount of the required equity in exchange for a participation in the cash flow and equity of the project.
Normally, the equity lender will require a preferred rate of return in the range of 8% to 15% per annum. This preferred return may be paid monthly to the extent that project cash flow is available or would accrue if the project is under development. The types of real estate which are well suited for Equity lending are similar to Mezzanine lending.
Lending Parameters:
The basic lending parameters that are available through Venture Financial Ltd. for equity financing are provided below:
Equity Investment Amount: From $1,000,000 and no maximum loan amount.
Developers Profile: Developer with strong and proven track record with a reputation for quality and success in the local market, and in the particular transaction that is being developed.
Project Profile: A well located project in a major urban market (in Ontario) with a healthy pro forma profit margin.
Project Status: The investment is normally made at the time of acquisition of the land. In most cases, there has not been substantial progress made in selling units (in the case of residential real estate) or pre-leasing (in the case of commercial real estate). Zoning, however, must be in place although an application for a density increase may be in process.
Preferred Return: 8% to 15% per annum. This return may be paid monthly or, in the case of a development project, may be accrued subject to lender’s approval. The preferred return is first paid to the Lender and then to the Developer prior to the balance of the proceeds being split in a mutual agreement upon proportion.
Equity Split: Normally the equity is split equally on a 50/50 basis. In cases where many of the normal development risks have been mitigated, the Lender may accept a lower equity split.
Term: Normally 1-4 years.
Mezzanine Financing
Mezzanine Financing is high-risk lending structured as a mortgage which normally ranks in 2nd or 3rd position behind conventional institutional or syndicated debt.
The most common need for mezzanine lending is on the following types of developments:
low rise residential developments
high rise residential developments
retail or industrial developments where some level of pre-leasing has been achieved
any under-performing real estate with legitimate ‘turnaround’ potential
Lending Parameters:
The basic lending parameters that are available through Venture Financial Ltd. for mezzanine financing are provided below:
Loan Amount: Loan amount to range from $500.000 to $ 10.000.000. No maximum loan amount.
Developer Profile:
Experienced with a reputation for quality and success in the local market.
Project Profile:
A well located project in a major urban market in the Ontario with a healthy pro forma profit margin.(Marginal projects can not be qualified for these types of loans)
Project Status: The development must be showing good potential. In the case of a condominium development, the marketing campaign must show a good level of pre-sales with the level of sales showing steady and consistent growth. In the case of a retail plaza or industrial building, there would normally be a requirement for some level of pre-leasing (say 40%-80%) and the typical Term of such loan should be 1-2 years. In the event of Joint Venture the Term can be longer.
Equity Contribution: Normally at least 80% of the total equity requirement will be funded by the Lender with the 20% balance contributed by the Developer. The Developer contribution is normally in the form of cash equity, although an appraisal increase in the value of the land may be considered where it is substantial and verifiable.
Interest Rate: An internal rate of return of 15% to 30% as negotiated between the parties, and based on the risk assessment of the lender.
Lender’s Fees: Normally 2.0% (in some cases this fee may be added to the loan amount).
Term: 1-3 years. Broker’s Fees: 2.0% – 5.0%
