Leveraged Breakdowns

REPE Interview Prep: Fund-Level Debt, Tenant Credit, and REIT vs. REPE

Introduction

Real estate private equity firms expect you to walk into your first interview with substantial industry knowledge. Yet how could a complete outsider ever know what to expect from such a technical ordeal? Enter Leveraged Breakdowns, the premier resource to prepare you for real estate private equity jobs. In this article, you should read each question as if you’re sitting in a live interview. Practice your responses out loud without looking at the answers for best results.

What is the difference between asset-level debt and fund-level debt?

Asset-level debt is a loan against a specific property, where the loan amount and the repayment terms are customized to the cash flow and the value of the specific property being financed. For certain real estate private equity firms, this can be an inefficient financing mechanism because of the time and costs involved with negotiating loans on each property that is acquired. Fund-level debt treats the assets of the fund as one large pool, and structures a large loan based on the value and cash flow of that pool. With this type of financing, assets are acquired with all cash, and then once the pool of assets is owned, financing is put in place to replenish the fund’s cash to continue acquiring assets. This is a very efficient and cost effective financing strategy for the borrower and the lender, because it allows lenders to place large amounts of capital in one loan, reducing fees, time, and usually the interest rate.

Where would you find information to underwrite the tenants in a commercial property?

The first place to look is for any ratings from the major agencies, S&P, Moody’s, or Fitch. For publicly traded companies that aren’t rated, analyst reports can be a good source of information. 10-K filings with the SEC or transcripts of earnings calls can also be helpful. Some privately held companies will publish annual reports. In some cases, the listing agent or the landlord may have access to financial information on the tenants and can release it to prospective buyers under a confidentiality agreement.

What are the differences between a REIT and a private equity fund?

The three major differences are that a REIT is a special type of entity that is required by law to distribute 90% of its income back to owners as a dividend each year, REITs are usually long-term holders of real estate, meaning more than 10 years, and REITs typically use less than 50% debt on acquisitions. A private equity fund, on the other hand, is a very customizable structure that allows management much greater authority in distributing funds to investors, and generally have a hold period around five, or maybe ten years, and may use more leverage in order to help boost returns to investors.

For outsiders, by insiders

Real estate private equity jobs can be much easier to secure with the right preparation. Leveraged Breakdowns is created and maintained by industry veterans who want to level the playing field for ambitious outsiders looking to break in. We distill our experience through courses such as Breaking Down REPE to teach you fundamental skills such as asset-level modeling.

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