| Institutional real estate investors buy, develop, | | | | investor may also leverage the deal with mezzanine |
| manage and sell real estate assets with an aim to | | | | financing. Due to the higher risk second lien position, |
| achieve superior returns while abating risk by holding | | | | mezzanine loans are available at higher interest rates |
| a portfolio of properties. These firms include real | | | | than senior debt, but are useful in bridging funding |
| estate investment trusts (REITs), private equity | | | | gaps. |
| firms, hedge funds, various joint venture partnerships | | | | REALIZING PROFIT |
| and other funds raised for this purpose. | | | | A return on investment is realized through: |
| INVESTMENT INTERESTS | | | | * Cash flow from operations - cash flow provides a |
| While many real estate investment firms have target | | | | return on investment either through dividends to |
| sector interests such as commercial, industrial, office, | | | | shareholders or through a reduction in debt. |
| retail, residential, raw land, financial securities and | | | | * Capital gains - upon selling a property, investors |
| healthcare related real estate, many firms are sector | | | | realize capital gains from both natural and forced |
| agnostic and invest on an opportunistic basis. | | | | appreciation. Natural appreciation occurs through |
| DEAL STRUCTURE | | | | general market price movement over time. Forced |
| Institutional real estate investors often employ a | | | | appreciation occurs when the investor makes capital |
| combination of financial instruments in their capital | | | | improvements to the asset or operational changes to |
| structure to leverage equity capital with senior debt | | | | improve the property's potential and marketability. |
| and/or mezzanine debt. | | | | * Tax advantages - tax advantages include the ability |
| The level of debt an investor can place on an | | | | to expense/deduct the interest portion of the debt |
| investment depends on the property's asset base | | | | capital employed (thus, decreasing the cost of debt |
| and the cash flow generated from operations. Senior | | | | capital even further) and the ability to depreciate the |
| debt provides a lower cost of capital financing | | | | asset on the books even though the market value |
| solution because of its first lien position in the event | | | | of the property may in fact be increasing. |
| of a default. If additional funds are needed, an | | | | |