When Dana Corp. decided to divest its real estate capital financing division and focus on its core automotive business, executives Rex Paine and Charles Singletary jumped on a unique opportunity to purchase the group's $150 million portfolio. Both men, former bankers, had been instrumental in building Dana's Commercial Credit Real Estate Services portfolio by providing mezzanine financing to retail, office, multifamily and industrial properties nationwide.

Fortress Investments, a New York-based firm, financed their purchase of the portfolio, renamed Torreon Capital, in August 2002. Since then, Torreon, which is based in Austin, Texas, has grown the business by providing mezz equity financing through Fortress in the range of $3 million to $20 million for ground-up developments and acquisitions. With projects in California, North Carolina, Texas, Florida and the Midwest, the company chalked up $70 million in transactions in 2004. NREI talked with Paine about Torreon's business strategy, its role in the development process and its perspective on commercial real estate.

NREI: Describe your relationship with Fortress Investments and what sort of returns mezz equity providers can expect in today's market.

Paine: They're our exclusive venture capital partner. We find and underwrite transactions and decide together to invest in transactions. We're generally in the deal for a three- to four-year time frame. The internal rate of return (IRR) varies from the high teens to upper 20s, depending on how much risk there is in a given transaction.

NREI: What role does your firm play in the development process?

Paine: Typically we provide a preferred, or gap equity position and form a limited liability corporation with the developer. Very often [developers] don't want to put any money in the project. For instance, you might have a retail power center where you have a majority of tenants lined up before you acquire the property. The developer would typically go to the construction lender for 80% of the capital. We would provide the other 20% as equity and split the profits with the developer.

NREI: What types of properties and markets are you interested in?

Paine: We focus on retail, multifamily, industrial and office properties. We have gone into larger markets that provide opportunities to do infill locations. We have also had success in secondary markets, the smaller cities that some [developers and lenders] won't be willing to go to because there's a smaller population.

NREI: What types of projects pique your interest?

Paine: We're always looking for projects that provide some unique opportunities. For instance, in a very developed city like Pasadena, Calif., there's obviously no new open land, so you have to go through a long approval process with the city. So, if the developer has found a piece of property that can be developed and has the proper entitlements and can do that in a relatively short period of time, it's a barrier to entry that not only helps lease your project but helps sell your project.

NREI: Are you concerned that the mezzanine financing arena is becoming crowded, and that mezz sources could end up making unwise deals?

Paine: Yes, on both counts. I haven't seen them go wildly crazy. More money has moved into real estate. I don't think that's always going to be the case. I think that over time other investments, such as stocks, will begin to come back. There will still be money in real estate but it will be less extravagant.