Each time someone develops, improves, purchases, or refinances a piece of real property, he or she must raise or contribute capital. The dollars involved are enormous. As estimated in The Changing World of the Real Estate Developer, the value of U.S. residential property is on the order of $5 trillion. The value of all U.S. property, including commercial property, is certainly in excess of $7 trillion. If only 5% of this property value were developed, improved, sold or refinanced in a given year, this would require $350 billion in new financing transactions per year.
Real estate investments are financed through a combination of debt and equity capital. The use of debt, or borrowed money, is very important in real estate, and a substantial majority of the new capital flowing into real estate is normally in this form. By year-end 1987, U.S. properties were supporting about $2.75 trillion in mortgage debt. The balance of the property value, of course, represents the owner's equity capital.
Each individual transaction may be financed with up to 100% debt, or in some instances, 100% equity capital. Real estate developers often seek to borrow 100% (or more) of the cost of the project. (This is called "financing out.") Major foreign and institutional investors will often pay 100% til the purchase price of a property in the form of equity. However, most transactions involve both debt and equity capital, with debt usually in the majority.
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