Property finance explained
LEM solutions view property according to risk profile. In simple terms, the more security the lower the risk, where security is defined as investment ÷ property value.
The Equity is the riskiest part of the capital structure and suffers losses first. Likewise it benefits the most in an upturn.
The mezzanine is generally where 2nd legal charges are formed. This carries less risk than equity, but has less security than debt.
The debt is generally the safest part of a property. It has very low risk, but also low (and stable) returns.
Property in more detail
As one can now see, the typical property can be split into risk levels.
Each of these levels has a different profile, ranging from high returns (with high risk volatility) to low risk (with a low and stable return profile). Each part suits a different class of investor. If an entity purchases an entire property (without borrowing), they have effectively assumed risk at every part of the capital structure.
To add to the above, every property purchase will come with some necessary professional fees, in the form of a surveyor (for valuation) and solicitors in order for both parties to have a secure and fair contract. There will also be estate agent & loan arrangement fees (it is common for loans to be taken), insurance & tax. Stamp duty is the largest single cost to a property deal in the UK.
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