Question
(Hybrid Financing with a Lookback IRR) An investor acquires a property with expected operating cash flows (PBTCF) shown below. In addition to a senior permanent
(Hybrid Financing with a Lookback IRR) An investor acquires a property with expected operating cash flows (PBTCF) shown below. In addition to a senior permanent mortgage loan, the capital structure includes a mezzanine loan with the following features: $15 million loan, 10-year term, 1% upfront fee, 7% annual interest and annual payments. Payments are interest-only payments in years 1 through 5, Principal payments, in addition to interest, start in year 6 and are specified as a function of PBTCF as follows: year 6 = 10% of property operating PBTCF, year 7 = 20%, years 8, 9, & 10 = 25% of PBTCF. In addition, at the end of year 10, the investor must make a lump sum payment such that the mezz lender receives a 14% internal rate of return on the mezz loan investment. This lump sum includes the principal or balance owing on the loan plus a bonus to bump the expected total return to 14%. Based on this information and the property cash flows, show the expected loan cash flows and determine the size of the lump sum and the bonus that must be paid. [Hints: Answer this in Excel either using trial and error with the =IRR() function or alternatively using the Solver or Goal seek tool. Note that the mezz lenders initial time zero investment is $14.85 million because of the upfront 1% fee, though interest payments are based on the full $15 million principal amount]
1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | |
PBTCF | 6,746 | 9,894 | 10,505 | 11,283 | 11,780 | 12,348 | 12,920 | 13,438 | 14,201 | 14,694 |
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