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Here, we explore the difference between the types of investment opportunities and whatthey can offer you

THE REAL ESTATECAPITAL STRUCTURE

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Real Estate transactions are usually financed with a mixture of EQUITY

(ownership interest) and DEBT (borrowings)

The importance of the capital structure is that each component will have

different risk and return characteristics

REAL ESTATE FINANCING 101

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EQUITY MEZZANINEDEBT

SENIORDEBT

HIGHEST RISKHIGHEST RETURN

MEDIUM/HIGH RISKMEDIUM/HIGH

RETURN10% - 15%

LOWEST RISKLOWEST RETURN

5% - 8%

5% - 20% OF FUNDING

10% - 15% OF FUNDING

60% - 80% OF FUNDING

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EQUITY

Equity does not carry a defined

rate of return or interest, or have a

defined term

UNDEFINEDOWNERSHIP

Equity represents the ‘ownership’ in

the property or project

Any debt, and interest

underpinning the entity must be paid out before

equity is returned

PAYMENT

Equity carries most risk, however there is no cap on potential return.

The more successful, the

greater the return

RISK

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Preferred Equity is a second type of equity that includes enhancements as an incentive to invest and lower overall interest

PREFERREDEQUITY

Enhancements include a defined rate of interest, however as a tradeoff, there may be limitations on participation in the project

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MEZZANINE DEBT

WHAT IS IT?

Mezzanine Debt is the next level of funding after

equity

INSTITUTIONAL

This debt is usually

provided by specialist

institutions

INTEREST RATE

Mezzanine Debt carries a

defined rate of interest (10% to

15%) to compensate for

elevated risk

RISK

While Mezzanine Debt

may be secured, risk is

higher as interest and

capital is only paid after

Senior Debt obligations are

satisfied

TERM

Mezzanine Debt is usually a

fixed term of 12 months to 2

years

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Secured by real estate assets, so repaid in full while losses may be incurred by Mezzanine Debt and Equity holders

SECURITY

Low risk profile means Senior Debt earns lowest rate of interest (5% to 8%)

RISK

Senior Debt usually has a fixed term of 12 months to 3 years

TERM

Senior debt usually makes up the largest component

of overall funding (60%-80%)

WHAT?

Most often provided by banks

WHO?

Senior Debt means that debt and interest must be

repaid before any other debt or equity can be

repaid

PAYMENT

SENIORDEBT

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Every real estate project is unique and the capital structure will be different for every project.

As an investor, it is important to understand the type of investment, potential returns and the associated risk.

INVESTING IN THE CAPITAL STRUCTURE

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