Investcorp Forms $1B Entity to Acquire RE Debt

Though the acquisition of real estate debt isn’t new, current market conditions seem to have given investors new impetus to acquire such debt. Recently, Investcorp’s U.S.-based real estate group formed a new entity, Investcorp Real Estate Credit Fund L.P., to do just that, and more recently, it has closed on real estate debt valued at $210 million for an undisclosed, but presumably discounted, price. The acquisition involved several mezzanine loans collateralized by various single-asset properties and multiple-asset hotel portfolios across the United States. Both junior and senior mezzanine loans were included in the deal. Investcorp completed these transactions using capital from Investcorp Real Estate Credit Fund L.P., as well as capital from the group’s first mezzanine fund. The credit fund is a $1 billion vehicle funded with capital raised from Investcorp, its clients, and a Persian Gulf sovereign wealth investor. It was formed to acquire whole loans, mezzanine loans and CMBS collateralized by well-performing U.S. commercial and residential real estate assets. Since 2002, Investcorp has originated or acquired about $600 million of debt and preferred equity. Beginning in late 2006, the group formalized its activities in this area with the launch of its Mezzanine Fund I, a $108 million fund created to originate and acquire mezzanine debt, preferred equity, and CMBS in the United States. Investcorp isn’t the only investor taking a strong interest in real estate debt during these unsettled economic times. As reported earlier this week by CPN, Inland American Real Estate Trust Inc. has committed to invest $100 million in a JV between Winthrop Realty Trust and Lexington Realty Trust that specializes in debt acquisition. “The opportunity is in the loan-to-value equation,” George Pandaleon, president of Inland Institutional Capital Partners, told CPN. “Lenders who were willing to lend 75 percent of, say, 2005 values, now are only willing to lend 60 to 65 percent of 2008 value, which is typically lower, too.” “To give a simplified example, yesterday’s $75 million mortgage on a $100 million property turns into a $54 million dollar loan–60 percent of now $90 million value–on the same property when it comes due,” Pandaleon continued. “There’s a big opportunity to fill the resulting ‘gap’ with higher-interest second mortgages on high-quality properties with strong owners.”