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ARIXA FUND FAQS

By Jan B. Brzeski


Which Arixa funds are open to new investment?

What is the basic investment strategy of Arixa Secured Income Fund and Arixa Fund III? How do the two funds differ?

What is the difference between a first trust deed and a mortgage?

Who should consider investing in Arixa investment funds?

What returns can I expect from my investment?

What interest rates do you charge your borrowers?

What is the loan-to-cost of Arixa's loans?

What is the average maturity of Arixa's loans?

Why do borrowers pay such high interest rates? Are these loans really risky?

How have the interest rates in this market evolved over time?

Is lending to house flippers a sustainable strategy for the long-term?

Why don't major wall street firms invest in this strategy?

It was not too many years ago that investments in mortgages lost people a great deal of money. How is this investment any different?

Where does Arixa lend? How much geographic diversification does Arixa maintain?

Since Arixa mainly lends in California, what would happen if California experienced a huge earthquake?

What if a fire destroys the home that is security for a loan?

What is Arixa's historical default rate?

What happens when a borrower defaults?

What are the biggest risks to investing in Arixa funds?

How could Arixa investment funds lose money?

How do I know you are not Bernie Maddoff?

What procedures do you have in place to ensure that when money is wired into and out of your company it's not being stolen and wired into someone's private bank account?

How is it to redeem my money out of Arixa investment funds?

How often is income distributed?

How is Arixa investment income treated for tax purposes?

What does Arixa charge?

How much leverage does Arixa fund III use?

How are the funds structured?

Can I invest in Arixa funds through an IRA?


Which Arixa Funds are open to new investment?

Arixa Secured Income Fund and Arixa Fund III are open to new investment. 

What is the basic investment strategy of Arixa Secured Income Fund and Arixa Fund III? How do the two funds differ?

Arixa Secured Income Fund and Arixa Fund III make short-term loans secured by real estate to professional developers who purchase single-family homes for renovation and resale.  The biggest distinction between the two funds is that Arixa Secured Income Fund does not use leverage and Arixa Fund III does use leverage.   Leverage means that Arixa Fund III borrows money from the bank and uses that money along with investors’ capital to make more loans than would be possible with investor capital alone.  Leverage enhances returns for investors, but it also increases the risk.  Arixa Secured Income Fund can therefore be described as lower return and lower risk, and Arixa Fund III as higher return and higher risk.  

What is the difference between a first trust deed and a mortgage?

Arixa invests in first trust deeds, or loans collateralized by houses.  Practically speaking there is no difference between a first trust deed and a mortgage.  A first trust deed is just what they call a mortgage in California and other Western states.

Who should consider investing in Arixa investment funds?

Arixa investment funds are income oriented vehicles designed to preserve principal and generate higher income returns than what is available from publically traded income oriented asset classes such as bonds.  Investors interested in generating passive and consistent income while protecting principal would benefit from investing in Arixa investment funds.  

What returns can I expect from my investment?

Arixa Secured Income Fund is targeting returns between 7-9% per year after fees.  Arixa Fund III targets returns from 10-11% after fees. 

What interest rates do you charge your borrowers?

As of April 2016 we are typically charging between 9-10% plus an origination fee of 1-3% for loans that range from 6 and 18 months. 

What is the loan-to-cost of Arixa’s loans?

Arixa lends between 75-85% of the lower of cost or value of a single family home. 

What is the average maturity of Arixa’s loans?

The overwhelming majority of Arixa’s loans have terms between 6 and 12 months.  Arixa has made loans as long as 18 months and as short as 1 month. 

Why do borrowers pay such high interest rates? Are these loans really risky?

These loans are not as risky as the high interest rates would suggest.  In fact if evaluated and structured properly, these loans are quite safe.  People flipping houses pay high interest rates to private lenders like Arixa, because banks cannot move fast enough to meet their financing needs.  There is a great deal of competition for “fixer-upper” type houses.  People in that business often need to purchase a home with financing in place in a matter of a week or they will lose the deal.  Banks will not accommodate these borrowers no matter how good the borrower or how valuable the house.  Banks simply have too many regulatory requirements to be able to process a loan in 10 days or less.  For this reason there is a scarcity of capital relative to the demand for loans in the flipping business.  And, if you recall from your Econ 101 class, if a market has high demand and low supply prices rise, prices in this case being the interest rates that borrowers pay.  

How have the interest rates in this market evolved over time?

When Arixa Secured Income Fund was first established in 2010, borrowers were paying 13% and 3 points for a 6 month loan at 80% loan-to-cost.   That’s a 19% annual rate.  Four years later we are charging 10% and 2 points for the same loan, a 14% annual rate.  The invisible hand is at work and more lenders have entered the space as investors have discovered the incredible risk-adjusted returns available in this strategy.  Fundamentally, however, due to the non-scalable nature of this niche market, this space is relatively protected from large pools of Wall Street money.  In California rates will likely continue to decline gradually as they have for the past four years, but we anticipate risk adjusted returns relative to other fixed income alternatives will remain attractive for the foreseeable future.   

Is lending to house flippers a sustainable strategy for the long-term?

Flipping houses is an industry with a long history in California and there is no reason to think that it won’t continue.  Much of coastal California’s housing stock was built in the 1950’s and 1960’s, and many of these homes do not fit contemporary tastes or meet modern needs.  For this reason we see a great deal of opportunity for our borrowers in refurbishing California’s aging housing stock. 

Why don’t major Wall Street firms invest in this strategy?

In short, Wall Street firms cannot make enough money from flip loans to make it worth their while. The size of each investment and the work involved in creating each investment properly combine to make this business “non-scalable” from their perspective. Furthermore, these loans have short maturities, less than 12 months, which makes securitization, a major revenue driver for Wall Street, impossible.  It is the absence of huge amounts of capital in this market that explains the strong risk-adjusted returns available to those willing and able to participate in the market. 

It was not too many years ago that investments in mortgages lost people a great deal of money. How is this investment different?

This investment is different, because Arixa’s portfolios are comprised of good loans.  The mortgage crisis was precipitated by lenders making high-leverage (95-120% loan-to-cost) loans, collateralized by overvalued houses to borrowers who could not afford the interest payments.   These lenders were incentivized to lower their lending standards because they could make a great deal of money selling these bad loans to Wall Street.  By contrast, Arixa requires that its borrowers provide 20-25% of the capital for a project.  Arixa checks that a borrower has enough cash in the bank to complete the project, make all interest payments, and provide for any cost overruns.  Arixa conservatively values the house serving as collateral and evaluates the project on the basis of its profitability.  And most importantly, Arixa holds on to its loans as investments servicing them until they mature.  Arixa takes care to know the borrowers and their projects well, only making sound loans for well-capitalized profitable projects, and closely monitoring borrowers for delinquencies. 

Where does Arixa lend? How much geographic diversification does Arixa maintain?

Arixa began as a California lender and has only recently begun to lend in other states on a selective basis.  The focus of Arixa’s lending operations is in California and will likely remain so. 

Since Arixa mainly lends in California, what would happen if California experienced a huge earthquake?

Southern California is very active seismically and there is a possibility that an earthquake severely damages or even destroys a building. Due to the fact that the most devastating effects of earthquakes are localized it is unlikely that more than a few houses in the portfolio would be severely impacted.  In the event that a house is destroyed in an earthquake, and the borrower defaults, the trust deed investment will lose a significant portion of its value.  The property value would be reduced to land value, minus the cost to demolish and haul away the remains of the building.  In a portfolio of 30 loans, however, losing money on any single investment, or even a few investments, does not cause the entire portfolio to lose money.  Arixa’s funds are a diversified portfolio of trust deeds located throughout California, which mitigates the risk of loss due to a severe earthquake in one particular locale.  Furthermore, even in a strong earthquake, total destruction of a building beyond repair is quite unlikely.  

What if a fire destroys the home that is security for a loan?

Arixa is named as an “additionally insured party” on the fire insurance at the time of the investment. This way, in case of a fire, Arixa would receive its original investment back even if the borrower defaults.   

What is Arixa’s historical default rate?

Since Arixa began in 2010 we have originated over 600 loans and have had three defaults.  Due to the margin of safety built into each of these loans, both defaulted loans ended up being profitable investments for the fund.   

What happens when a borrower defaults?

A default occurs when the borrower fails to make an interest or principal payment, or fails to live up to some other provision of the loan agreement. At this point, the lender instructs the loan servicer (an independent company that deals with the borrower) to file a notice of default. This is the first step in a series of events that culminates in a foreclosure sale. In California, it takes about four months to hold a foreclosure sale after the notice of default is filed.

At any time prior to the foreclosure sale, the lender and borrower could make arrangements that would obviate the need for the foreclosure sale. For example, the borrower could cure the default by bringing all of his or her payments current. Or, the lender could give the borrower an extension on the loan maturity.

When a foreclosure sale takes place, there are two main outcomes. Either the lender ends up owning the property; or, someone else makes an all-cash bid to purchase the property and the lender accepts that bid instead of taking back the property.

What are the biggest risks to investing in Arixa Funds?

The biggest risk of this strategy from an investor’s prospective is not that the current Arixa portfolio losses money in a massive real estate collapse, but that the portfolio manager losses his discipline, lowers his lending standards and starts to make riskier loans.  The current portfolio is composed of well-collateralized short-term loans (75-85% of cost) made to borrowers with strong track records, and would survive a 2008 like downturn nicely.  The danger would be that the composition of the portfolio changes.  If competing lenders were to start loosening credit standards and to extend higher leverage loans, an undisciplined portfolio manager might be tempted to follow suit, making riskier loans in order to meet the return expectations of investors.

Arixa is committed to maintaining its current low risk profile even if the market shifts and return expectations have to come down.  Additionally, Arixa is committed to transparency and makes available to investors detailed information on each loan that it makes so that investors can see for themselves that Arixa is maintaining its promised low risk profile.

How could Arixa investment funds lose money?

An investment in Arixa Secured Income Fund or Arixa Fund III is an investment in a pool of short term loans collateralized by houses.  Each loan typically has a loan-to-cost of 75-80%, which means that the loan amounts are 75-80% of the cost of the homes that are collateralizing them.  The Funds can lose money on an individual investment if Arixa has to foreclose on a home and then cannot sell that home for more than the loan amount.  This could happen if there is a sharp decline in the value of that home, or if the home was overvalued when the loan was made.  Losing money on a single investment however, does not necessarily mean that the overall fund would lose money.      

In order for an investor in one of the funds to lose principal, there would have to be multiple foreclosures and the values of the homes would have to fall precipitously (15-20%) in a 12 month period such that the houses could not be sold for more than their loan amounts. 

How do I know you are not Bernie Maddoff?

One great characteristic of this investment strategy is that it is simple and completely transparent.   Arixa lends money to people, and that loan is secured by a house.  The First Trust Deed is a recorded instrument that legally gives either Arixa Secured Income Fund or Arixa Fund III a first position lien on the property.  This lien is recorded on the title of the property and is a matter of public record.  Arixa makes available online to its investors all of the recorded first trust deeds that comprise its portfolios. Investors as members of the funds can therefore directly trace their interest to the recorded position.  In addition Arixa provides online to its investors, the signed Promissory Note so that investors can link the loan to the recorded first trust deed that backs it.  

Additionally the financial statements of Arixa’s funds are independently audited by CohnResnick LLP.  These audited financial statements are made available online to investors.  

What procedures do you have in place to ensure that when money is wired into and out of your company it's not being stolen and wired into someone's private bank account?

When wiring funds out of the fund operating account there is one person, a senior controller, responsible for executing the wire transfer.  In addition, the Principal of the firm must then approve the wire request with the bank.  Furthermore, it is our policy to only wire money to one of the 6 main title companies, or a company backed by one of these title companies:  

First American Title Insurance Company
Fidelity National Financial
Stewart Title Insurance
Old Republic Title Insurance Company
North American Title Insurance Company
Chicago Title
When a loan matures and there is an incoming wire, the title company must wire funds to an account that has the same name as the beneficiary on the deed of trust.  Someone cannot tell the title company to wire funds to XYZ Cayman Island account, the title company can only wire funds to “Arixa Secured Income Fund, LLC”, for example.   

This being said, there is no way to 100% prevent fraud, especially if people collude.  There is a tradeoff between fraud protection, which can burden process and procedures, and efficiency.   At Arixa we try to strike the best balance possible between efficiency and protection.

How easy is it to redeem my money out of Arixa investment funds?

Arixa Secured Income Fund investors may redeem their investment quarterly, following a 6-month lock-up period. Arixa Fund III investors may redeem 25% of their capital contribution each quarter, following a 12-month lock up period.  

How often is income distributed?

  • Arixa Secured Income Fund distributes income monthly.  
  • Arixa Fund III distributes income monthly. 

How is Arixa investment income treated for tax purposes?

Distributions from Arixa investments funds are taxed as ordinary income. 

What does ARIXA charge?

Arixa Secured Income Fund is currently charging a 1.75% asset management fee per year and targets 7-9% net return for investors. 

Arixa Fund III charges a 1% asset management fee per year and the manager shares in 20% of the profits of the fund after investors receive a 10% preferred return.  In addition the manager charges borrowers up to 2% per loan as an origination fee. 

How much leverage does Arixa Fund III use?

The manager plans to use 50% leverage for a debt-to-equity ratio of 1:1. 

How are the funds structured?

Arixa Secured Income Fund is structured as a limited liability company.  Investors purchase membership units in the LLC and become Members of Arixa Secured Income Fund, LLC.  Arixa Management, LLC is the Managing Member of Arixa Secured Income Fund, LLC.  Arixa Secured Income Fund, LLC is the lender of record for each loan that the fund makes.  As a member of the LLC, investors will own a proportionate share of all the loans held by the fund.  

Arixa Fund III is structured as a limited partnership.  Investors purchase partnership units in the L.P. and become Limited Partners of Arixa Fund III, L.P.  Arixa Management, LLC is the General Partner of Arixa Fund III, L.P.  Arixa Fund III, L.P. is the lender of record for each loan that the fund makes.  As a Limited Partner of the L.P., an investor will own a proportionate share of all the loans held by the fund.  

Can I invest in Arixa Funds through an IRA?

Investors can invest in Arixa Secured IncomeFund through a self-directed IRA.  If you wish to invest and do not have a self-directed IRA, we would be happy to provide you with a list of third party companies that could assist you.  

Investors can use a self-directed IRA to invest in Arixa Fund III, however, the fund’s use of leverage generates unrelated business taxable income (UBTI), which creates a tax liability for investors who invest through a self-directed IRA.