REITs turning all that glitters into gold.

There's no doubt about it, in investment sales, individual investors stole the show in 2004.

According to data compiled by Cushman & Wakefield, private investors, empowered by cheap interest rates, an abundance of capital and a lower yield tolerance, accounted for 59% of all building purchases in Manhattan with foreign investors and REITs accounting for 24% and 13% respectively.

But in a year of supremacy for the individual, some REITs have managed to turn losses on bids for acquisitions into a profitable situation by providing mezzanine loans to the successful bidder.

Vornado was a high profile example of the REIT as lender in 2003 when it lost in its bid for the GM Building but provided winner, Harry Macklowe, with $250 million worth of mezzanine financing.

"Some REITs have gotten into mezzanine lending because they have major capital capability but can't find enough value added investment opportunities," said Ben Lambert, president of Eastdil and one of the top real estate financing gurus in the city.

An abundance of capital and the consequent wild competition in the debt markets hasn't made the lending position an easy one to secure.

But REITs can enjoy an advantage over other lenders in providing real estate mezzanine financing by offering lower interest rates--something they are enabled to do because of their expert insight into the viability and vibrancy of real estate markets and also their preparedness in taking over a property in the rare case of a default.

"They see themselves as well equipped to become the owner of the property so the worst case scenario--a default--isn't necessarily a bad thing for them," Lambert said.

In the case of the GM loan, Vornado most probably didn't accomplish the deal with a 'loan-to-own' strategy in mind, but rather because it correctly identified--where other non-REIT lenders didn't--how strong the Plaza district was, despite the tough times for fundamentals, and that the GM building consequently carried a lower risk profile than other lenders had assigned it.

"Vornado trimmed off basis points on their mezz' loan and it was justified because Macklowe got the premium rents that, at that time, nobody was sure the market would support," said Hugh Hall, chief operating officer of Gramercy Capital Corp., a REIT that is 25% owned by SL Green and deals exclusively in providing loans.

Loan-to-own, while an alluring strategy for acquisitions in a market dominated by individuals willing to buy into extraordinarily low cap rates, has been deemed too rare and protracted by most experts in the industry to be employed as a consistent path to ownership.

That doesn't mean it never happens.

Mitchell Hersh, president and CEO of REIT, Mack-Cali, dished out a mezzanine loan for 1 River Center in Red Bank, New Jersey, then converted it into a 62% majority ownership interest with rights to buy out minority holders.

"It was an advantageous situation for us because, before we actually gained ownership of the property, I had a real opportunity to watch how the asset performed," Hersh said.

"We had an excellent return and we had a chance to take over leasing and management and the property has flourished.

"I entered into that deal with an eye on purchasing it and took advantage of the mezzanine loan to acquire the property, which has been another great property in our portfolio."

Rising interests rates, however, provide the biggest bastion of levering the playing field or tipping it back in favor of the REIT buyer.

Hall pointed out that borrowers aren't always comfortable taking loans from REITs, as there is the perception--whether false or true--that such lenders are particularly eager to capitalize on defaults.

Furthermore, the capital markets are so stacked with competition that returns, when weighed against risk profiles, have shrunk markedly from where they were only a few years ago.

"SL Green was a pioneer in mezz' lending and did it very successfully for many years," Hall said.

"They've stopped providing those types of loans and right now we're not doing any mezzanine loans either. So that might tell something about the immediate future for mezz lending as a lucrative option for REITs."