Assume an investor who would like to buy some commercial real estate that has a $1 million purchase price. This property generates $100,000 of annual net operating income. The investor can get $600,000 in financing for the purchase from a senior lender with a 5% interest-only loan.

Now assume this investor doesn’t have $400,000 in capital to commit to this deal. To bridge the gap the investor is considering a mezzanine loan from another lender. The mezzanine lender can provide $200,000 in mezzanine financing at a 10% annual interest rate.

What is the investor’s annual return assuming no mezzanine loan?

What is the investor’s annual return assuming the use of the mezzanine loan?