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 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 6¼ 10% of property operating PBTCF, year 7 ¼ 20%, years 8, 9, & 10 ¼ 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.
