Comparing costs of capital
So I'm looking at an interesting problem right now. My firm is making a series of acquisitions (entitlement / early stage development deals) that can't be financed by senior debt. We've been raising equity for our GP platform under a very favorable structure and also have a great relationship with a mezz lender with flexible money. The question is, at what level of deal performance does the mezz become the cheaper source of capital?
The equity is just a split over a pref.
The mezz has a hefty fee, quarterly payments, a true-up to a certain IRR, then a bunch of tiers of participation (e.g. if the deal hits a 19% IRR, they get a true-up to a 14% yield, if it hits a 22% they get a true-up to a 15%).
So I'm trying to find the break-even. Obviously in an upside scenario you'd prefer the mezz. It's also more flexible in that you can just clear it out at any time. But before I go and start playing around and modelling this to compare I wanted to throw this post up to see if anybody has a simple way of thinking this though.
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