There are two investment options when participating in Value Added projects (real estate construction and renovation):
- Mezzanine financing: the investor lends capital to the developer in exchange for a fixed interest for the use of the funds and, in some cases, gets a share of the profits from the project, known as an equity kicker.
- Equity financing: the investor provides the developer with equity capital, participates in the project and gets a share of the profits.
Each strategy has its own benefits and drawbacks investors should be aware of.
The investor providing mezzanine financing makes interest on the loan. In addition, the lender can claim an extra allowance from the net profits in the form of warrants or options. Mezzanine loans yield an average
The equity partner gets a share of the operating profits. This amount depends on a number of factors: the cost of capital, the scale
The assessment of risks associated with the two strategies is related to the project
The equity partner does not enjoy the same level of protection. The equity partner is paid after the mezzanine investor and will be the first to incur losses if the project provides low returns. However, in an equity partnership, the returns are better, and this strategy will be more beneficial if the project is successful.
The less flexible mezzanine financing option is safer for the investor. In this arrangement, the investor receives
At the same time, mezzanine financing has greater flexibility in financing terms (payment regularity, debt redemption, interest rates and loan term) compared to a bank loan, and it is not always collateralised.
|Mezzanine financing||Equity partnership|
|Type of capital||Debt||Equity|
|Source of profit||Loan interest
and equity kicker
the project realisation
|Payment priority||Second (after the senior,
|Structure||Less flexible but simpler
and more defined (fixed payments
and repayment periods)
|Less defined but more
flexible (payments depend
on the cash flow)
|Control||The investor can have
a representative on the board
|The investor can participate
in the project management
George Kachmazov, managing partner at Tranio