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