The renovation of the 38-story building began in July 2005, while pre-sales for the 408 luxury condos started last January. Amenities include interiors by Armani Casa, multiple lounges, concierge service, a gym, yoga studio and golf-swing simulation room.
There is little mystery why a real estate group might expand into mezzanine financing. The commercial property debt market in the US is expected to grow by more than $200 million (€156 million) each year and—according to documents released by the Pennsylvania State Employees’ Retirement System as it was considering an investment in the Apollo vehicle—the trends making real estate debt favorable are threefold: Property fundamentals are improving, spurred by economic recovery; competition is increasing between players at the senior debt level; and interest rates are increasing, leading to an increase in acquisition yields and distress for highly leveraged owners.
The Apollo vehicle is targeting returns of 16 to 18 percent and will no doubt build upon the success of the firm’s $100-million mezzanine joint venture with GMAC, which is anticipating returns of more than 20 percent according to public records from Pennsylvania SERS.
Earlier in November, New York-based private equity investor Warburg Pincus announced it was pursuing a slightly different tack via a new joint venture with The Bascom Group, which plans to invest more than $200 million in non-performing loans and distressed multi-family properties via senior and subordinated debt instruments. The JV is focusing on acquiring loan purchases in the $1-million to $100-million range. Meanwhile, distressed investor Avenue Capital is raising $250 million to invest in the real estate market.
In all cases, an interesting trend is developing: Equity players in the property markets—who may or may not have dabbled in debt in the past—are increasingly focusing their efforts on both parts of the capital structure.
It’s a phenomena perhaps best illustrated by something Apollo head Lee Neibart told PERE earlier this year.
“We have real estate skills,” he said of Apollo. “And those real estate skills are adaptable to opportunity funds, valued-added funds, mezzanine funds. A partner here may have been in the development business, but if that business is risky one day, there’s no reason he can’t be involved in making a very profitable mezzanine loan. We’re capable of doing all different types of things.”
Increasingly, the private equity real estate industry seems to agree.