· A demonstrated track record in the space.
· A background in real estate rather than financial engineering; they should originate loans, not buy them.
· Funds with a broad diversification by location, property type and borrower.
· Loans that are not overly structured and do not have too much leverage.
· Funds with transparency—those that provide detailed information about the assets, tenants, rent rolls, etc.
The Opportunity
Mezzanine debt is a product with a long history in the commercial real estate market. Demand for high-yield subordinate loans is expected to increase in coming years due to the wave of loan maturities set to hit the market, while at the same time, banks have reduced their lending on commercial property due to increasing capital requirements. For a savvy investor, mezzanine debt can be a valuable way to earn high current income without taking on undue risk, while at the same time diversifying into a traditionally underweighted market segment.
Bruce Batkin is CEO and co-founder of Terra Capital Partners, a New York-based real estate capital management firm focused primarily on originating, acquiring and managing bridge loans, mezzanine loans and preferred equity investments backed by commercial properties.