In some cases, yes, but not very often. Most of the time both lenders will still want to borrower to have “skin in the game” by putting in some of their own money. - Trevor
Wall Street likes to make up fancy names for simple things. Gap loan and junior debt are perfectly acceptable synonyms. Common preference in the lexicon varies by region. Good question! Thank you! - Trevor
Good question. A simple weighted average doesn’t account for principal paydown. If the payments were interest only, then the simple formula would be accurate. But since the payments are amortizing, then you need to calculate it the way that I show in the video. Let me know if you would like more examples. I hope that helps! - Trevor
Hi Brady. Calculating a monthly loan payment is done using an amortization table, which is built into any financial calculator, or can be done with a spreadsheet. Check out my lessons on 'How to Use a Financial Calculator' and 'How to Calculate a Loan Payment', and let me know if I can help. - Trevor
Hi Jaafar. This is a simple Time Value of Money calculation, solving for rate (i). If you have any 3 of the 5 components of TVM (number of periods, rate, present value, payments, and future value) then you can solve for the other 2. In this case, everything must be converted to monthly (i.e.25 years x 12 = 300 mos., etc.) When you solve for rate (i), you get a MONTHLY interest rate of 0.4035, which when multiplied by 12, gives an annual rate of 4.84%... If you don't know how to do these calculations, check out my Finance Fundamentals playlist or my "Know Your Numbers" Crash Course on my website. Hope that helps! - Trevor
No. Convertible means that the loan agreement contains a clause that the debt may be 'converted' to equity at a later point in time. Mezz debt can be convertible if it's written into the loan terms. - Trevor
@@RealEstateFinanceAcademy so other than the higher interest and collateralized real estate on the subordinate liens , do you know of any other items of recourse that would cause a lender to be more at less risk of losing large or all capital invested ?
Typically the lender is going to require that the borrower have a net worth greater than the total debt. That way, in the event of default, if there is a deficiency (leftover debt) after the property is sold, then the lender can sue the borrower and go after their other assets in order to recover the remaining amount owed to them. I touch on this in my video on Recourse vs. Non-Recourse Loans. Hope this helps! let me know if you have more questions. - Trevor
Ok I just watched it , so I were to have a non recourse subordinate loan in place utilizing that as the bridge / gap loan , I know it states that it's a non recourse would there be any monetary supplemental measures that I can put into place either up front or somewhere after servicing loan in order protect the lenders behalf being that they are in 2nd position ? I say this because I will be raising capital and I would like to protect as much as possible all of the people that I am in partnership and or am custodian of their money .
Hello. Yes, developers can access mezzanine financing in certain cases, depending on the project. Contact us at Evergreen Capital and let's see if we can help. - Trevor evergreen.llc
It is. The loans are amortizing, not interest-only. You just need to understand how to calculate a loan payment. (I have lessons on that for you, too.) Regardless, that isn’t the point of this lesson, which is to demonstrate how a Mezz Loan impacts your weighted average cost of capital. - Trevor
@@RealEstateFinanceAcademy I am CFO dear ,That rate which you multiplied by 12 ,that is annual percentage rate , i am talking about the effective annual rate , the real rate
Good stuff 3 years of nyc real estate development in the masters programs and 5 minutes with your video was a lot clearer
Thank you! That means a lot, especially since I was a professor in a Masters of Real Estate program. 😉👍🏻😂 - Trevor
Best explanation I found so far. Thanks!
Thank you for the nice words, Maro! Much appreciated! - Trevor
Thank You! You will be hearing from me.
Great explanation Trevor!
Hi Shiva. Thank you very much. Glad you liked it! - Trevor
no question. just wanna help the rithms. nice vid 👍
Cool, thanks! - Trevor
great and simple explanation! thank you!
My pleasure. Happy to help. Thanks for the comment! - Trevor
Can you do a video creating this example on a debt schedule in excel from scratch?
Hi Tariq. Great request. I’d be happy to! - Trevor
Great explantation. Thank you.
You’re welcome! Happy to help! - Trevor
Can a mezzanine loan and senior debt collateralize for 100% of the project cost? Or does the sponsor/borrower need to come in with direct equity?
In some cases, yes, but not very often. Most of the time both lenders will still want to borrower to have “skin in the game” by putting in some of their own money. - Trevor
highly informative thank you Trevor
My pleasure, Vivek. Thanks for the comment! - Trevor
Very clear. Thanks
Glad it was helpful! Thank you! - Trevor
Thank you for making this to the point. Great video.
Great explanation!
Thank you! 😊👍🏻🙏🏻 - Trevor
Thanks for the knowledge. But.... WHY is it called "mezzanine"? Why not gap loan, or junior debt?
Wall Street likes to make up fancy names for simple things. Gap loan and junior debt are perfectly acceptable synonyms. Common preference in the lexicon varies by region. Good question! Thank you! - Trevor
Well said! Thank you!
My pleasure! I’m glad you liked it. Thanks for the feedback! - Trevor
How would that 4.84% WACC compare with the 4.75% simple weighted average? 4.75% = (4%*7/8)+(10%*1/8). How should we understand the difference?
Good question. A simple weighted average doesn’t account for principal paydown. If the payments were interest only, then the simple formula would be accurate. But since the payments are amortizing, then you need to calculate it the way that I show in the video. Let me know if you would like more examples. I hope that helps! - Trevor
great explanation, bravo. grazie
Thank you! - Trevor
Great explanation thank you!
Thank you, Devin! - Trevor
Great video!
Thanks! Glad you liked it! - Trevor
Can you explain how to run that equation where you figured out your monthly payment for the initial senior loan?
Hi Brady. Calculating a monthly loan payment is done using an amortization table, which is built into any financial calculator, or can be done with a spreadsheet. Check out my lessons on 'How to Use a Financial Calculator' and 'How to Calculate a Loan Payment', and let me know if I can help. - Trevor
@@RealEstateFinanceAcademy Thanks for the quick response! I'll watch your video and try to figure it out. Will reach out if I have questions.
Thanks!! There aren't any mezzanine lenders you'd recommend talking to are there?
Hey Adam, give us a call at Evergreen Capital and we can definitely help you! evergreen.llc - Trevor
Thanks for sharing, could you please simplify how you calculated (0.4035)? exponents 85? 75? 56?
Hi Jaafar. This is a simple Time Value of Money calculation, solving for rate (i). If you have any 3 of the 5 components of TVM (number of periods, rate, present value, payments, and future value) then you can solve for the other 2. In this case, everything must be converted to monthly (i.e.25 years x 12 = 300 mos., etc.) When you solve for rate (i), you get a MONTHLY interest rate of 0.4035, which when multiplied by 12, gives an annual rate of 4.84%... If you don't know how to do these calculations, check out my Finance Fundamentals playlist or my "Know Your Numbers" Crash Course on my website. Hope that helps! - Trevor
This is amazing!
Thanks. Happy to hear! What are you working on?! - Trevor
Thank you
You're welcome. It's my pleasure. Thanks for your comment! - Trevor
great video
Thank you! - Trevor
Interesting. Is mezzanine the same as convertible?
No. Convertible means that the loan agreement contains a clause that the debt may be 'converted' to equity at a later point in time. Mezz debt can be convertible if it's written into the loan terms. - Trevor
@@RealEstateFinanceAcademy Oooh, so in other words a mezzanine "can be a convertible" but is not necessarily one?
Yes, that’s correct. 👍🏻
Hello , does this concept apply for gap funding also ?
Yes, exactly. 👍🏻
@@RealEstateFinanceAcademy so other than the higher interest and collateralized real estate on the subordinate liens , do you know of any other items of recourse that would cause a lender to be more at less risk of losing large or all capital invested ?
Typically the lender is going to require that the borrower have a net worth greater than the total debt. That way, in the event of default, if there is a deficiency (leftover debt) after the property is sold, then the lender can sue the borrower and go after their other assets in order to recover the remaining amount owed to them. I touch on this in my video on Recourse vs. Non-Recourse Loans. Hope this helps! let me know if you have more questions. - Trevor
Ok I just watched it , so I were to have a non recourse subordinate loan in place utilizing that as the bridge / gap loan , I know it states that it's a non recourse would there be any monetary supplemental measures that I can put into place either up front or somewhere after servicing loan in order protect the lenders behalf being that they are in 2nd position ? I say this because I will be raising capital and I would like to protect as much as possible all of the people that I am in partnership and or am custodian of their money .
Trevor I have a few questions. Can a Developer access Mezzanine loan , Tequila, Petroleum Co
Hello. Yes, developers can access mezzanine financing in certain cases, depending on the project. Contact us at Evergreen Capital and let's see if we can help. - Trevor
evergreen.llc
the rate should be compounding
It is. The loans are amortizing, not interest-only. You just need to understand how to calculate a loan payment. (I have lessons on that for you, too.) Regardless, that isn’t the point of this lesson, which is to demonstrate how a Mezz Loan impacts your weighted average cost of capital. - Trevor
@@RealEstateFinanceAcademy I am CFO dear ,That rate which you multiplied by 12 ,that is annual percentage rate , i am talking about the effective annual rate , the real rate
@@RealEstateFinanceAcademy I am talking about corporate