Mezzanine

Dominic Reilly

Director, Jones Lang LaSalle Finance

17 November 2011

Finance

2

Contents

• What is mezzanine finance?

• In what circumstances is mezzanine finance used?

• What motivates a financier to provide mezzanine?

• How is mezzanine finance priced?

• How is the financier’s position secured?

• Typical providers

• Typical cash flow

• What is the prognosis/future for mezzanine finance?

3

What is Mezzanine Finance?

Expensive Debt

Cheap Equity or

4

What is Mezzanine Finance?

100%

65%

RISK RETURN

Total Return 15% - 25% p.a.

Cost of Funds

plus 7.5% - 12.5% p.a.

Cost of Funds

plus 2.0% - 3.0% p.a.

EQUITY

MEZZANINE

SENIOR DEBT

80%

5

In what circumstances is Mezzanine Finance used?

Where the owner has insufficient funds/equity

Where the owner wishes to share risk with a financing

partner

Where the use of mezzanine will enhance the

return on invested equity

6

What motivates a Financier to provide Mezzanine?

Enhanced returns over and above

Senior Debt

Lower risk than outright ownership

Participation in asset

management gains

Backing a specialist real estate owner

7

How is it priced?

Arrangement fees

Interest payment or coupon

Exit fees

8

How is the financier’s position secured?

As debt would be secured

• i.e. Charges and Guarantees

As Equity

• i.e. Loan stock and preferred shares

Typical providers

9

• Duet Private Equity Ltd

• Ekistics Property Advisors LLP

• Investec

• LaSalle Investment Management

• Longbow Real Estate Capital

• M & G Investments

• Maslow Capital

• Matrix

• Pacific Real Estate Capital Partners

• Pluto Capital

• Pramerica

• Queen Anne Street Capital

• QIB (Qatar Islamic Bank)

• RBS

10

Typical Cash Flow

PURCHASE PRICE

Net Initial Rent £750,000 per annum

PURCHASE PRICE £10,000,000

Net Initial Yield 7.09%

FINANCING SUMMARY

INDEPENDENT OPEN MARKET VALUE £10,000,000

SENIOR DEBT £6,000,000

Loan to Value Ratio 60.0%

Income to Interest Cover 3.05 times

5 Year Swap Rate 1.85%

Margin 2.25%

Interest Charge 4.10%

MEZZANINE FINANCE £2,000,000

Loan to Value Ratio 80.0%

Income to Interest Cover 1.68 times

Arrangement Fee 3.0% £60,000

5 Year Swap Rate 1.85%

Margin 8.15%

Interest Charge 10.00% per annum

Exit Fee 3.00% £60,000

11

Typical Cash Flow Year

Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16

1 2 3 4 5 Totals

Rental Income

Rental Income £750,000 £750,000 £750,000 £750,000 £750,000 £3,750,000

Capital Value £10,000,000 £10,000,000 £10,000,000 £10,000,000 £10,000,000 £10,000,000

Investment Yield 7.09% 7.09% 7.09% 7.09% 7.09%

SENIOR DEBT

Brought Forward £6,000,000 £5,940,000 £5,880,000 £5,820,000 £5,760,000 £5,700,000

Interest -£246,000 -£243,540 -£241,080 -£238,620 -£236,160 (£1,205,400)

Repayments -£60,000 -£60,000 -£60,000 -£60,000 -£60,000 (£300,000)

Carried Forward £5,940,000 £5,880,000 £5,820,000 £5,760,000 £5,700,000

Income To Interest Cover 3.05 3.08 3.11 3.14 3.18

Loan to Value Ratio 60.0% 59.4% 58.8% 58.2% 57.6% 57.0%

MEZZANINE FINANCE

Brought Forward £2,000,000 £2,000,000 £2,000,000 £2,000,000 £2,000,000 £2,000,000

Interest Paid -£200,000 -£200,000 -£200,000 -£200,000 -£200,000 (£1,000,000)

Carried Forward £2,000,000 £2,000,000 £2,000,000 £2,000,000 £2,000,000

Income To Interest Cover 1.68 1.69 1.70 1.71 1.72

Loan to Value Ratio 80.0% 79.4% 78.8% 78.2% 77.6% 77.0%

MEZZANINE CASH FLOW

Mezzanine Invested -2,000,000

Interest £200,000 £200,000 £200,000 £200,000 £200,000 £1,000,000

Fees 60,000 60,000 £120,000

Repay Mezzanine 2,000,000 £0

Cash Flow -1,740,000 200,000 200,000 200,000 200,000 2,060,000

Internal Rate of Return 12.6%

Surplus Rent after Debt Service £244,000 £246,460 £248,920 £251,380 £253,840 £1,244,600

12

What is the prognosis/future for mezzanine finance?

Growing appetite from greater number of providers

New entrants to the market gaining an exposure to the UK Real Estate Market

Many are seeking to plug the gap between loans due for repayment and the amount

available today by way of Senior Debt

But…

• An expensive source of finance only suited to some projects

• For some borrowers, there are few alternatives, therefore eroding their returns

• Current providers could extend their activities to providing senior debt thereby increasing the capital needed to

repay an over-borrowed and over-lent market

Thank you

COPYRIGHT © JONES LANG LASALLE IP, INC. 2011