Real estate debt funds have a variety of leverage options
Debt fund managers have access to a variety of leverage tools to finance loans originated by a fund, and these tools differ significantly depending on the risk/return profile of a given fund. Each type of leverage has separate structure considerations and pricing ranges. Financing tools available for real estate debt funds consist primarily of nonrecourse structural leverage (at the asset/borrower level) and recourse or partial recourse fund-level leverage.
Debt funds use various forms of leverage, a term which refers to bifurcating an asset-backed whole loan into “senior” and “junior” components. The senior component is retained by a senior lender (e.g., commercial bank, life insurance company, pension fund), while the debt fund retains the junior component. Senior loan components typically size from 0 percent loan-to-value (LTV) ratio up to approximately 50 percent LTV of the collateral asset, with junior loans providing additional leverage beyond that level. Levera