Whyis the levered IRR higher than the unlevered IRR

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Reference no: EM132047316

A proposed acquisition of a multifamily 'value add' project has a cap rate of 7%, and project un-levered IRRS of 10% over five years. however, you are told that the acquisition could be done with the following cap structure: 60% 1st mortgage debt at an 8% rate, 10% mezz debt at an 11% rate and 30% equity. with the new cap, the levered returns are projected to be 15% over five years. Given that the first mortgage debt and mezz debt rates are higher than the cap rate- WHY is the levered IRR (15%) higher than the unlevered IRR (10%)

Reference no: EM132047316

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