This is from a vignette (Book 5, Page 65, Reading 38 : Private Real Estate Investments).
Question 12 :
Richmond Life Insurance Company’s potential investment would be most likely described as:
A. private real estate debt. B. private real estate equity. C. publicly traded real estate debt.
The correct answer and explanation is : “A” , because the potential investment is a “mortgage”
I could not understand why this is a mortgage investment. Here are some excerpts from the vignette:
“… wants to reduce the amount invested in traditional asset classes and gain exposure to the real estate sector by acquiring commercial property in the United States.”
“… Tang asks Rodriguez to evaluate financing alternatives to determine if it would be better to use debt financing or to make an all cash purchase.”
I don’t understand how these clues point to the purchase of an MBS and not a private equity investment… Any insights?
dont have the book but buying commercial property usually involves borrowing money AKA getting a mortgage in order to buy it, hence private real estate debt
It doesn’t state he’s making an all cash purchase does it? If it did then it would be B.
Let me know
Thank you for the response Andrew.
As far as I am reading this is all that it is mentioned in terms of intention to invest. The vignette does not ever go on to mention what the final decision was anyway. I am aware of the need to get a mortgage to finance your investment but your position is still vested in the equity you are purchasing with it, isn’t it?
I mean even if they required leverage to invest in the final product, isn’t the investment still on the purchased product and not the means used to purchase it? (this forum needs better emoticons)
The characteristics described (LTV, DSCR, loan term) describes the characteristics of a traditional mortgage. This is a private real estate debt investment because it’s not securitized. If it was securitized it would probably be a part of CMBS. My understanding of it anyways…This isn’t an equity investment because it’s on a loan.
My understanding of it anyway…
Richmond in this case is the lender and not the main subject company. That is why richmond has a debt invesment since it is borrowing funds to the company for a leveraged equity purchase.
This is confusing me too. But how come richmond is the lender?
Yes! Thank you so much for this