Friday, June 09, 2006

Pitting Investors Against One Another
The more I think about affiliated mezzanine debt deals the more I do not like them. You have a sponsor offering two products that are polar opposites in terms of objectives. The equity offering uses the debt from the mezzanine deal to bridge its property purchase. It is in the equity offering's best financial interest to use the mezzanine debt for as short a period as possible, if at all (fast equity raise). And it's in the mezzanine offering's best financial interest to have the debt outstanding for as long as possible (slow equity raise). Something's got to give.

The sponsor would better serve investors by scraping the mezzanine deal and focusing on raising money for the equity deal. Quality TIC offering's still sell out in a short period of time, negating the need for mezzanine debt. Rather than go to the trouble (and expense) of a debt offering, the sponsor should find better properties, structure the equity deal better (i.e. less fees and higher returns to investors), and hire a better sales force. It is likely that the need for a mezzanine deal is a sign that the equity offerings are not that great.

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