Mezz Lending Models?
Can anyone speak to how they make their models in mezz loans?
1) Would you value the property on a stabilized basis, look at the debt metrics through the whole capital stack (senior + junior + equity), then split the cash flows between the senior and junior debt, looking at debt metric KPIs through both senior and junior debt? For your own returns, are you looking at it from IRR, using forward curve of base rates + a spread, and any other fees (origination, exit, extension, etc.)?
2) How does this differ in between construction and acquisition/ refi/ bridge loan assets? And for resi, how would you look at it for condos versus multifamily?
3) Am I missing anything here?
Anyone have mezz models they can share or potentially point me towards? Thank you!
Ah, the world of mezzanine lending models, quite a fascinating topic! Let's dive in:
1) In terms of valuing the property, you're on the right track. You'd typically look at the property on a stabilized basis and consider the entire capital stack (senior, junior, and equity). The cash flows are indeed split between the senior and junior debt, and you'd monitor key debt metrics through both. For your own returns, IRR is a common measure, factoring in the forward curve of base rates, spread, and any associated fees (origination, exit, extension, etc.).
2) The approach can differ between construction and acquisition/refi/bridge loan assets. For construction, you'd likely have to account for the risk and uncertainty associated with the development process. This could involve more conservative assumptions and potentially higher return requirements. For acquisition/refi/bridge loans, the property is often already generating income, so the analysis might focus more on the property's current performance and market conditions. As for residential properties, condos and multifamily units can have different risk and return profiles, which would be reflected in the model.
3) You seem to have a solid grasp of the basics! One thing to keep in mind is that every deal is unique, so the model should be flexible enough to accommodate different scenarios and assumptions. Also, don't forget to consider the borrower's creditworthiness and the overall market conditions.
As for sharing models, I'm afraid I can't do that directly. However, I'd recommend checking out the WSO Academy or the WSO Courses. They offer a wealth of resources on financial modeling, including mezzanine lending. You might also find some helpful insights in the WSO Networking Guide or in previous WSO threads.
Remember, the key to mastering mezzanine lending models (or any financial model, for that matter) is practice, practice, practice! So keep at it, and don't hesitate to ask if you have more questions.
Sources: Development Model - Construction Loan + Mezz, RE Mezzanine Debt, Mezz Debt Lenders for a $5M ecommerce business?
Following.
No think too much. Model own money invested then IRR from cash flow received after senior debt service - your own costs. Collateral is excess value, but senior lender gonna take everything.
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When modeling mezzanine loans, one approach is to value the property on a stabilized basis, consider debt metrics across the capital stack, and split cash flows between senior and junior debt. Return analysis often involves IRR calculations using forward curves, base rates, spreads, and various fees. The modeling approach may differ for construction versus acquisition/refinancing/bridge loans, as well as for condos versus multifamily properties. While specific models can't be shared here, online resources, financial modeling courses, and industry publications may provide examples and templates to assist with building your mezzanine loan models.
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