Optimal Leverage in Real Estate Investment with Mezzanine Lending

John McDonald

Journal of Real Estate Portfolio Management, 2007, vol. 13, issue 1, 1-6

Abstract: Executive Summary. This paper presents a theoretical analysis of the optimal leverage for the purpose of investing in real estate under the condition that borrowing in excess of a standard amount such as 70% to 80% of the purchase price must be accomplished through a mezzanine loan with a high interest rate. The conditions under which a mezzanine loan is used are derived. The findings indicate that the larger mezzanine loan, the greater is the required expected after-tax rate of return to equity. Investors who choose greater risk require a higher expected after-tax return to equity and therefore borrow more and purchase more real estate with a given equity investment.

Date: 2007
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DOI: 10.1080/10835547.2007.12089765

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