The document discusses mezzanine finance, which provides financing that ranks between senior debt and equity. Mezzanine finance is used when project owners need additional funds but cannot use all equity, or when using mezzanine will enhance returns. It is typically more expensive than senior debt but less risky than equity. Mezzanine financiers are motivated by enhanced returns over senior debt and participation in asset management gains. Their position is secured like debt through charges and guarantees or like equity through loan stock and preferred shares. The future of mezzanine finance is growing with more providers but it remains an expensive option only suited to some projects.

1. Mezzanine Finance
Dominic Reilly
Director, Jones Lang LaSalle Finance
17 November 2011

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?
2

3. What is Mezzanine Finance?
Expensive Cheap
Debt or Equity
3

4. What is Mezzanine Finance?
100%
80% EQUITY Total Return 15% - 25% p.a.
Cost of Funds
65% MEZZANINE plus 7.5% - 12.5% p.a.
RISK RETURN
Cost of Funds
SENIOR DEBT plus 2.0% - 3.0% p.a.
4

5. In what circumstances is Mezzanine Finance used?
Where the owner wishes to Where the use of
Where the owner has
share risk with a financing mezzanine will enhance the
insufficient funds/equity
partner return on invested equity
5

6. What motivates a Financier to provide Mezzanine?
Enhanced Participation
Lower risk Backing a
returns over in asset
than outright specialist real
and above management
ownership estate owner
Senior Debt gains
6

7. How is it priced?
Arrangement Interest payment
Exit fees
fees or coupon
7

8. How is the financier’s position secured?
As debt would be secured As Equity
• i.e. Charges and Guarantees • i.e. Loan stock and preferred shares
8

9. Typical providers
• 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
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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
10

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
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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
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13. Thank you
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