Mezzanine finance (2nd mortgage)

Hi all,

Haven't been around for a while, and have found all the changes!

Sim tells me this is where I should ask a question on mezzanine finance. And before anyone asks: no, I have not done a HK course.

I got into a JV part financing a development in Brisbane. It is going well, and the returns are good. As a result, and being contacted by one of the guys in the JV, I have been approached to be part of another JV providing mezzanine finance (2nd mortgage).

I know the risks, they come with the high returns. What I would like to do is find someone who has experience in mezzanine finance and off whom I can bounce some detailed questions and get some feedback.

For example, is it correct that some of the following requirements can reduce the risk:
a) permit in place (not just pending), good location and correct market
b) 100% presales consummated (not just dummy presales)
c) first mortgagee committed
d) assessment and reports from independent lawyers, QS, accountant and valuers
e) top quality builder
f) developer and builder to have multiple times asset covering of the value of the mezzanine loan
g) tri-party agreement to stop first mortgagee having a fire sale

What else should I be doing my due diligence on? Any other advice/opinion/idea/suggestion/recommendation?

Thanks for any help!
Cheers
Apprentice Millionaire
 
Welcome back AM (aam?)

I haven't done a mezzanine finance deal yet. Come close a couple of times but not yet.

I'd make sure my lawyer has done them before. That would be the cheapest and simplest form of insurance you can get.

Regards

Paul Zag
Dreamspinner
 
Hi,

Beside your lawyer checking all the paperwork do look at the credit rating of the developer. I recently declined a good deal in which even though the papers were OK the main developer had a recent bankrupcy. (they will never tell you that).

Which state are you in?

Thanks
Hexabit
 
Hi Paul,

Originally posted by paulzag
Welcome back AM (aam?)

Thanks! The aam comes from users names being restricted to a minimum of 3 letters.

I haven't done a mezzanine finance deal yet. Come close a couple of times but not yet.

I assume you mean that you were going to be the lender, not the recipient of the mezzanine finance? What stopped you from getting closer?

I'd make sure my lawyer has done them before. That would be the cheapest and simplest form of insurance you can get.

Yes, solicitors mortgages. Dale GG has a reference to one (mentioned it in one of his recent newsletters), and I also know of a mob in Qld (they're called MDRN). The returns are generally in the 8 to 10% range. If what I am looking at is not kosher, then I will be following up the solicitor's mortgage path.

Cheers
Apprentice Millionaire
 
Hi Hexabit,

Originally posted by hexabit
Hi,

Beside your lawyer checking all the paperwork do look at the credit rating of the developer. I recently declined a good deal in which even though the papers were OK the main developer had a recent bankrupcy. (they will never tell you that).

Which state are you in?

Thanks for that. I am sure that would be one of the background checks that would be done!

You seem to have experience with mezzanine finance. Do you do it on your own, or are you in a JV or syndicate?

I am in Victoria.

Cheers
Apprentice Millionaire
 
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