Arixa Capital has published their yearly newsletter comprising of highlights and opportunities throughout the year in review.
Growing your business fiscally and physically can be one of the most challenging things for a business owner to go through. The Los Angeles Business Journal mentions Jan Brzeski, Managing Director & Chief Investment Officer of Arixa Capital as one of the most influential lenders financing the opportunities in redeveloping and rebuilding the World War II-era style homes across California.
Illustration with Two Funds
Suppose there are two funds, each making loans at 75% of cost which works out to 60% of after-repair value. Each fund has 50 loans of $1 million each. One (unlevered) fund has $50 million of investor capital and no bank debt. The other (levered) fund has $40 million of investor capital and $10 million of bank debt.
Both funds hold loans on property whose gross value upon sale is $83 million ($50/.6). Assuming that the market is flat, increasing gradually or decreasing gradually, the levered fund will have higher returns than the unlevered fund. Assuming that loans earn a 9% yield and the bank debt costs 5%, there would be a spread of 4% on the $10 million of bank leverage, adding $400,000/yr of income. This extra income is spread across $40 million of investor capital, equating to an increase in return of 1% per year over an unlevered fund, all other things being equal.
Stress Testing Both Funds
But suppose that the real estate market drops dramatically so that every loan goes into foreclosure and each fund only recovers $45 million total, of the $50 million invested in loans. This equates to a market drop of more than 40%.
In the unlevered fund, each investor would lose 10% of his or her investment (a loss of $5 million/$50 million). In the levered fund, the loss would be $5 million/$40 million = 12.5% of principal. In other words, the bank leverage helps returns in normal times but it exacerbates losses in the unlikely event of a steep decline in the market that is large enough to wipe out the substantial margin of safety in this strategy.
Note that the bank leverage is not changing the size of the margin of safety itself--both funds make loans with the same 75% LTV/60% loan-to-after repair value of the homes. It just changes what happens if this 40% margin of safety is breached.
Arixa Capital is a private commercial real estate lender specializing in acquisition financing, renovation, and construction loans. Founded in 2006, Arixa has made over $400 Million in real estate loans.
We provide senior and mezzanine financing solutions for experienced borrowers throughout California. Financing major commercial asset classes, we value our borrower relationships and appreciate the unique circumstances of each loan, striving to provide certainty of execution and speed to our clients.
Wealthy investors have a long tradition of putting their money to work in real estate, although
historically it has been in the hard asset itself. Now however, investors are gaining interest in the
lending segment of private real estate investing, by lending to developers who focus on building or
renovating high-end properties. This article drills into developments around the new ways that
investors are seeking to tap into real estate markets.
Please join us tomorrow, November 9th for an interview with Alan Snyder, a seasoned investment manager, talking about his multi-strategy non-bank lending fund designed to generate strong income together with low volatility.
For your convenience, there is a transcript and replay of the webinar, Lending on Single-Family Homes for Income. The presentation covers how to participate actively or passively in residential real estate, pros and cons of debt vs equity investments and where we are in the residential housing cycle.
In the second episode of our webinar series, we interview Greg Hebner, co-portfolio manager of Arixa Capital's real estate lending funds. Greg explains an investment strategy that is uncorrelated to the public markets; generates very attractive monthly income; and features a significant margin of safety in case the real estate market turns down. In the interview we will probe this strategy in detail to identify the risks and see how Arixa mitigates those risks.
A Los Angeles investment firm is seeking to raise a combined $100 million for two funds that provide short-term construction loans to builders of single-family home projects.
Arixa Capital is targeting high-net-worth individuals, family offices and other types of investors in its capital-raising drive. Arixa’s founder, Jan Brzeski, hopes to raise the bulk of the targeted $100 million by the end of 2017.