By Diane Harrison, Panegyric Marketing, Principal, Owner, November 15, 2016
Mind The Gap - Lenders Approaching
Filling the void where banks fear to tread
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. The strategy has an attractive potential payoff: anticipated returns typically range between 8-12 per cent. These yields are pulling both investors and fund managers to the sector, as the US market offers several regional locations in which this type of lending can flourish.
One such region offering attractive private lending opportunities is California, where specialty players are active in the private loan market. Cities like San Francisco, Los Angeles, and other coastal urban centers are seeing growing interest in the renovation and resale of a variety of both residential and commercial property types. There is an ample supply of potential projects and a lack of market participation from the larger institutional lenders, which increases the appeal for niche lending portfolio managers.
An added benefit for the investors in these small scale investments is that often, the average holding of such investment properties is roughly two years, which plays well into these investors’ desire for faster turnaround and liquidity of their investment funds.
One active West Coast player in the middle market lending space is finding growing opportunities to answer the question: Why don’t banks fulfill this lending gap in Ca for small scale developers? States Jan Brzeski, founder of LA-based Arixa Capital Advisors: "The banks are too slow to accommodate the small developers in this space, as the California market dynamics requires them to be both nimble and well-capitalized to turn properties around and resell them into this competitive market. The banks also require too much liquidity, assets, and income from the developers to adequately meet the needs of most for timely loans and construction activity. Developers are willing to pay a premium for the access to capital and speed to market that our lending platform can provide.”
Arixa’s business model of creating a basket of loans on projects with talented developers, originated and managed by a team of experienced portfolio managers, means investors in their funds earn attractive monthly income in the high single digits with a significant margin of safety and low correlation with most other investments.