We are a real estate finance company that has focused primarily on originating, investing in and managing commercial real estate debt, commercial real estate securities and net lease properties. We have invested in those areas of commercial real estate finance that enabled us to leverage our real estate investment expertise, utilize our broad capital markets knowledge, and capitalize on our ability to employ innovative financing structures. We believe that our three principal business lines are complementary to each other due to their overlapping sources of investment opportunities, common reliance on real estate fundamentals and ability to apply similar asset management skills to maximize value and to protect capital. We conduct our operations so as to qualify as a real estate investment trust, or a REIT, for federal income tax purposes.
We rely on the normal functioning of credit and equity markets to finance and grow our business. The current worldwide economic and financial crisis, which began in 2007 with increasing credit issues in U.S. sub-prime residential mortgage loans, has resulted in severe credit and liquidity issues throughout the worldwide financial system, a global economic recession, the failure of several financial institutions and several multinational financial institutions requiring governmental assistance to remain in business. Global deleveraging by financial institutions and economic contraction has greatly reduced the availability of capital for many businesses, including those involved in the commercial real estate sector. As a result, most businesses focused on the commercial real estate sector have significantly reduced new investment activity until the macroeconomic outlook becomes clearer and market liquidity increases. It is unclear whether government programs will accelerate the return of debt capital into the real estate sector. In this environment we are focused on actively managing portfolio credit to preserve capital, generating and recycling liquidity from existing assets, reducing leverage by purchasing our issued debt at discounts to par and seeking access to investment capital through channels other than the public capital markets.
The following describes the major commercial asset classes in which we have invested and which we continue to actively manage to maximize value and to preserve our capital through this difficult business environment. Beginning in the second half of 2007 and continuing throughout 2009, we significantly reduced new investment activity in these businesses, which was generally limited to a level supported by recycled capital from repayments and asset sales. For financial information regarding our reportable segments, see Note 20, Segment Reporting, in our accompanying Consolidated Financial Statements for the year ended December 31, 2009.
Real Estate Debt
Our real estate debt business has historically focused on originating, structuring and acquiring senior and subordinate debt investments secured primarily by commercial and multifamily properties, including first lien mortgage loans, which are also referred to as senior mortgage loans, junior participations in first lien mortgage loans, which are often referred to as B-Notes, second lien mortgage loans, mezzanine loans and preferred equity interests in borrowers who own such properties. We generally hold these instruments for investment, but we sometimes syndicate or sell portions of loans to maximize risk adjusted returns, manage credit exposure and generate liquidity.
We have built a franchise with a reputation for providing capital to high quality real estate investors who want a responsive and flexible balance sheet lender. Given that we are a lender who does not generally seek to sell or syndicate the full amount of the loans we originate, we are able to maintain flexibility in how we structure loans that meet the unique needs of our borrowers. For example, we can make a loan to a borrower that provides for an increase in loan proceeds over the loan term if the borrower increases the value of the collateral property. Typical commercial mortgage-backed securities, or CMBS, and other conduit securitization lenders generally could not provide these types of loans because of constraints within their funding structures and because they usually originated loans with the intent to sell them to third parties and relinquish control. Additionally, our centralized investment organization has enabled senior management to review potential new loans early in the origination process which, unlike many large institutional lenders with several levels of approval required to commit to a loan, allowed us to respond quickly and provided a high degree of certainty to our borrowers that we would close a loan on terms substantially similar to those initially proposed. We believe that this level of service has enhanced our reputation in the marketplace. In addition, the early and active role of senior management in our investment process has been key to our strong credit track record and ability to be responsive to changing market conditions. As of December 31, 2009, our average funded loan size was $19.8 million and we managed 102 separate commercial real estate loans totaling $1.9 billion.
The collateral underlying our real estate debt investments generally consists of income-producing real estate assets, properties that require some capital investment to increase cash flows, or assets undergoing repositionings or conversions, and may involve vertical construction or unimproved land. We seek to make real estate debt investments that offer the most attractive risk-adjusted returns and evaluate the risk based upon our underwriting criteria, sponsorship and the pricing of comparable investments. We have accessed the asset-backed markets to match-fund our real estate debt investments with non-recourse, term debt liabilities which were structured as collateralized debt obligations, or CDOs, and sold under the N-Star brand. These CDO transactions are flexible financing structures that have typically permitted us to re-invest proceeds from asset repayments for a five-year period after issuance with no repayment of the term debt, subject to certain criteria; thereafter, the CDO is repaid when the underlying assets pay off. In addition to these CDO financings we have utilized secured term financings and credit facilities to finance real estate debt investments.
Our real estate debt investments typically have many of the following characteristics: (i) terms of two to ten years inclusive of any extension options; (ii) collateral in the form of a first mortgage or a subordinate interest in a first mortgage on real property, a pledge of ownership interests in a real estate owning entity or a preferred equity investment in a real estate owning entity; (iii) investment amounts of $5 million to $200 million; (iv) floating interest rates priced at a spread over LIBOR or fixed interest rates; (v) an interest rate cap or other hedge to protect against interest rate volatility; and (vi) an intercreditor agreement that outlines our rights relative to other investors in the capital structure of the transaction and that typically provides us with a right to cure any defaults to the lender of those tranches senior to us and, under certain circumstances, to purchase senior tranches.
Investment Process for Real Estate Debt
We have employed a standardized investment and underwriting process that focuses on a number of factors in order to ensure each investment is being evaluated appropriately, including: (i) macroeconomic conditions that may influence operating performance; (ii) fundamental analysis of the underlying real estate collateral, including tenant rosters, lease terms, zoning, operating costs and the asset's overall competitive position in its market: (iii) real estate market factors that may influence the economic performance of the collateral; (iv) the operating expertise and financial strength of the sponsor or borrower; (v) real estate and leasing market conditions affecting the asset; (vi) the cash flow in place and projected to be in place over the term of the loan; (vii) the appropriateness of estimated costs associated with rehabilitation or new construction; (viii) a valuation of the property, our investment basis relative to its value and the ability to liquidate an investment through a sale or refinancing of the underlying asset; (ix) review of third-party reports including appraisals, engineering and environmental reports; (x) physical inspections of properties and markets; and (xi) the overall structure of the investment and the lenders' rights.
We may originate and structure debt investments directly with borrowers or may acquire loans from third parties. In the past we emphasized direct origination of our debt investments because this allows us a greater degree of control in loan structuring and in potential future loan modification or restructuring negotiations, provides us the opportunity to create subordinate interests in the loan, if desired, that meet our risk-return objectives, allows us to maintain a more direct relationship with our borrowers and provides an opportunity for us to earn origination and other fees. We believe that the continued lack of available debt capital for commercial real estate and poor economic conditions may present opportunities to obtain attractive terms from both new directly-originated loans and from pre-existing loans acquired from third-party originators, who may be motivated to sell due to liquidity needs or who are exiting the business.