Arixa Capital is looking forward to an exciting evening of networking and lively discussion on the Small Lot Ordinance on Thursday, July 20th at the W Hotel in Westwood. Simon Pastucha, retired Los Angeles City Planner and Alan Scales of KTGY Architecture & Planning will discuss the design guidelines, site organization and urban form, setbacks and building transitions, building design and materials, and much more.
The decade since the financial crisis has been challenging for our nation overall, but it has been a fertile period for non-bank real estate lenders. The great majority of Americans were angered by what they saw as reckless and sometimes cynical behavior by both commercial and investment banks
who profited immensely from lax lending practices, and then needed taxpayer bailouts to avoid bankruptcy.
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.