Edited by Craig C. Julian, Zafar U. Ahmed and Junqian Xu
In determining the viability of an investment, most developers and investors would take the first step of exploring the viability of an entirely debt, equity or a debt-cum-equity funded investment. But financing an investment entirely with equity would be inefficient as the firm foregoes the possible tax benefits of debt, and may risk a firm's liquidity status. Likewise, if the investment is to be entirely financed with debt, it would increase the firm's probability of bankruptcy. Hence, an appropriate mix of debt and equity (an optimal financing point) would minimize the overall cost of borrowing and in turn maximize the returns of having the investment. Various models have been developed to compute the optimal point of financing, for example the capital asset pricing model. Regardless of the numerous arguments that surround these models and theories, real estate developers and investors have continually used them in order to possibly reach the optimal point of debt-to-equity ratio. With the limit imposed by lenders that no 100 percent of loan principal issued, investors and developers would have to make up for the shortfall in the required loan principal through secondary financing. Mezzanine debt as an alternative source of secondary financing is not a new concept. After the financial crisis, real estate capital became scarce and prompted the need for alternative capital structures.
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