Niche markets.

Investors have recently been enjoying excellent returns on discounted and distressed real estate. But as prices for many distressed properties have stabilized, investors are starting to find it more difficult to profit from quick asset turnarounds.

There are, however, a variety of other opportunities for forward-thinking investors to position themselves in yet-to-blossom niche markets. Many projects showing strong upside income potential can still be acquired significantly below replacement costs in these niche areas. New and unusual financing tools can also provide investors with exciting opportunities.

Congregate-care facilities. Projects geared to the over-55 age group - from active-adult communities to nursing homes - will see their already fast-growing target audiences double in size over the next decade. Facilities such as apartment communities that offer older adults a menu of amenities ranging from meals and entertainment to beauty salons, and some medical care, are a particularly good investment prospect. One reason is that they have extremely low turnover rates.

Manufactured home communities. Demand for manufactured homes has been strong in most parts of the country, and occupancy rates have been high. Their popularity should keep growing. especially as the quality of the homes and parks alike continues to improve. Many communities are offering such amenities as golf courses. libraries, and recreational centers. Wall Street is bullish on manufactured housing communities, which allows active lenders ultimately to securitize mortgages collateralized by these communities.

Mini-storage facilities. These facilities have evolved from small, independently owned businesses to sophisticated, professionally managed chains. A variety of factors should fuel demand for these facilities through the rest of the decade: little maintenance is required, turnover is low and even the largest facilities can be managed by a small staff. Limited partnerships and real estate investment trusts (REITs) raised billions of dollars to finance the development and acquisition of mini-storage facilities in the 1980s. Financing is more difficult today with the tax-law-related decline in syndications and the reluctance of investment bankers to become involved with new mini-storage REIT offerings.

Hotels. The U.S. hotel occupancy rate has been rising steadily. Most experts expect that this trend will continue. A recent study by Arthur Andersen's Real Estate Services Group, for example, predicts that the U.S. lodging industry will see its bottom-line operating profit leap 7.5 percent in 1995, even more than the impressive 5.4 percent gain it recorded in 1994. Many builders and investors are focusing attention on hotels that are linked to a central reservation system. Opportunities in the luxury market are generally more limited and risky.

Customized financing. With financial institutions no longer taking a "cookie-cutter" approach to lending, developers are finding that they must work closely with their lenders to customize financing packages. Several specialty lenders, including Heller Financial, have devised "equity-financing," or "mezzanine" financing, that can fill the gap between the amount of money that most lending institutions require a builder to put into a transaction today and the cash that the builder is able - or willing - to commit. Equity-financing agreements can take a variety of forms. In some transactions, the equity lender will put up all the money that a developer or buyer needs to secure an even larger loan for its development and construction efforts. In others, the borrower puts in some of its own money and the equity lender provides the rest of the cash needed to satisfy the primary lender's requirements. These programs are frequently structured so that the lender has an opportunity to share in the project's revenue stream.

Many cash-strapped developers and investors are turning to lenders who provide equity financing st) they can start a new development or purchase an existing one while putting up limited capital. Increasingly, though, even cash-rich firms are using equity financing to minimize their financial expenditures and to diversify their assets.

Credit enhancement of tax-exempt bonds. This is evolving into a potentially lucrative niche for investors - particularly in the multifamily market. Credit enhancement can take on many different forms including 1) converting high. fixed-rate tax-free bonds to "low floaters" to significantly reduce debt service; 2) providing credit enhancements for the acquisition of projects with inexpensive low floating rate financing; and 3) re-enhancing existing projects based on today's economics given the previous enhancer's willingness to accept a discount when the property is overleveraged.

As many real estate investors revive their interest in traditional real estate investments, developers and investors who take the time to explore less-traditional opportunities may very well discover even more financial rewards in niche markets.

MICHAEL LOWINGER IS SENIOR VICE PRESIDENT AND WESTERN REGIONAL MANAGER FOR HELLER REAL ESTATE FINANCIAL SERVICES, WHICH PROVIDES A VARIETY OF INTERIM FINANCING PRODUCTS TO REAL ESTATE DEVELOPERS AND INVESTORS IN INCOME PRODUCING PROPERTIES.