mezanine investment

Fullout

Don’t do it. It is not worth the very high risk of losing all you money for a mere 25%.

A lot of HK disciples recently lost all their money when the developer went bust-some fraud involved as well. Some lost $300,000!

HK – Henry Kaye
National Investment Institute

http://www.nii.com.au

The risk is usually because these developments are hocked up to the eyeballs, and mezzanine debt is borrowed based on the anticipated value of the completed project.

As for mortgages, it’s usually a second, or even a third, mortgage, but definitely ranking below the bank’s mortgage (how it works is that the developer borrows most of the money from the bank, usually around 70%, and the rest from mezzanine debt and equity investors).

When the project goes sour, it usually does so before it’s completed. Which means that the bank steps in – and they only care about getting just enough to cover what they’re owed. If there’s no surplus, the mezzanine investor’s 2nd mortgage is as worthless as a politician’s promise to lower taxes (that is, sometimes it happens, but it usually doesn’t).

In some cases, the mezzanine debt is “wrapped” up in a trust structure, so you don’t even have direct rights to enforce the mortgage – you have to go through the trustee, who is usually an entity put in place by the developer. Even if it’s an independent party, there’s no guarantee that what the trustee thinks is the best course of action is what you really want done.

As you can see, the risks are high, which is why the returns are also high – to compensate for the risk. Obviously, there are projects that work, and the mezzanine investors get a nice fat payout. But you need to be prepared to lose everything you invested. If not, then invest your money somewhere else.

GMan has a point – check to see if there’s a prospectus. If there isn’t one, it may be illegal, or an unregulated “gold card” investment (meaning that it’s only for “sophisticated” or professional investors). However GMan – those $500,000+ investments you talked about are unlikely to have a prospectus, since they would be gold card investments.

Cheers
M

fullout – that sounds like the same prospectus that I received from CHG.

The part I didn’t like was that although you only need $5k to enter (good), you were required to maintain a $5k balance in their holding account earning a whopping 2% – 6% pa. In today’s climate, I expect it would be closer to the 2%.

And they didn’t really explain how you “got in” on the deals. Did they choose your money, or did you choose their deals.

I have also heard stories that you only get access to the big deals (ie, the 25% returns) once you’ve done some smaller ones, or when they decide they like you, or something…

Interesting to hear that some of HK’s disciples have lost money on a Mez deal. I thought he structured his so they were bulletproof (or is that just bulletproof for HK??)

hk gets people to speak about mez on the proviso that they can market to his disciples, these deals arent HK created deals.

quote:

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Louise, did u sign the form for registration?

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no – I balked after reading the prospectus. Good luck in dealing with them.

There was a posting made on the Somersoft forum at:
http://www.somersoft.com/forums/showthread.php?s=608dcb31ef648d9402e1a9c944173a1c&threadid=9980&highlight=mezzanine

But it has no been editied due to copyright infringements. It apears to be from an article called Flat Broke in BRW July 3, 2003

There is a link here
http://www.brw.com.au/stories/20030703/19427.aspx
But you have to be a subscriber to access it.

From memory, I developer was introduced to a group of NII clients. (The development company was unrelated to NII). The developer was offering mezz finance with nice interest rates. A lot of NII students signed up. The direcots of the company didn’t do things right, one even fled to NZ. The end result was a lot of people lost a lot of money.

Terryw
[email protected]