What can be expected from a higher yield investment such as mezzanine loans?

Higher yield investments, such as mezzanine loans, are typically associated with higher risk. This is because mezzanine financing is subordinate to senior debt, meaning that in the event of a default or bankruptcy, mezzanine lenders will be repaid only after senior lenders have been compensated. As a result, the potential for loss is greater compared to more secure investment options like first mortgages.

Investors in mezzanine loans demand higher yields to compensate for this increased risk exposure. The higher potential returns are an incentive for investors willing to take on the additional risks associated with the uncertain nature of the investment's cash flows, the borrower's creditworthiness, and market conditions. This aligns with the fundamental principle in finance that higher potential returns come with higher risks.

With this in mind, the remaining choices reflect characteristics that are not accurate for mezzanine loans. For instance, lower risk and stable returns do not apply since these loans inherently carry more risk and can lead to fluctuating returns. Similarly, standard valuation methods might not capture the complexities and uncertainties involved in mezzanine financing. Thus, the association of mezzanine loans with higher risk is a key understanding in real estate finance.