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Hi all,

I thought I'd try here, at my old haunt, first to see if Dr. T. or someone can help me understand something, or if not suggest a board that might help.

The question mark after my OT is because if a municipality issues GO bonds to invest in a highly speculative development project, as does happen, we're talking a municipality in deep doodoo, and even if it doesn't default, credit rating/value of existing bonds go down the tubes. Credit agencies seem oblivious to this risk and even more oblivious to municipalities contemplating such speculative investments, so anyone thinking of investing in munis should make checking out what is up public-private development-wise part of due diligence.

Anyway, the developer in question was facing foreclosure on a $3.5 million loan from a bank about 18 months ago on the property in which the municipality plans to invest. He refinanced with a $10.5 million bridge loan/mezzanine financing.

I have a rudimentary understanding of mezzanine financing (I don't know details about when balloon payment is due or anything like that). But I can't figure out why even a high risk lender would provide that much financing for a property that was theoretically worth $3.5 million (in reality, I'm guessing $2 million max). Might this be secured by multiple properties (though I can't for the life of me figure out what else this developer owns that could be used as collateral)? I'm guessing the developer wanted a lot more capital than needed to pay off the original loan (I doubt even with delinquent interest more than $5 million), because we're talking less than zero cash flow (and needless to say suspicions of where the cash flow is ending up).

Also, what happens when the balloon payment comes due and can't be met? I read something that suggested, because mezzanine financing is a kind of equity, the lender gets first in line picking the pieces, meaning in this case getting the property.

Anyway, any insights appreciated.

Loki
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