Strategy & Finance
Debt funds play a crucial role in commercial real estate (CRE) financing, providing investors with structured opportunities to earn attractive returns while mitigating risk through secured lending.
A buyer purchases a commercial property for $100 million. The expected return on this property, assuming no leverage, is 8.0% Unlevered Internal Rate of Return (UIRR).
The Debt Fund offers a $75 million loan to finance the purchase at a 7.1% coupon.
The Debt Fund borrows $60 million at a 6.1% coupon to fund part of its loan.
After financing $60 million through a warehouse line, the Debt Fund retains the remaining $15 million in equity.
| Component | Amount ($M) | Coupon / Return (%) |
|---|---|---|
| Property Purchase | 100 | 8.0% UIRR |
| Debt Fund Loan | 75 | 7.1% Coupon |
| Warehouse Borrowing | 60 | 6.1% Coupon |
| Debt Fund Equity | 15 | - |
| Levered Return (LIRR) | - | 11.1% |
Mitigation: Perform rigorous due diligence and evaluate LTV ratios.
Mitigation: Use hedging strategies like swaps or caps.
Mitigation: Structure staggered debt maturities and maintain cash reserves.
Debt funds offer an opportunity to maximize returns through disciplined underwriting and robust risk management frameworks.
