Why We Like Commercial Real Estate Private Credit

Posted by Ted Van Brunt on Sep 20, 2019 10:24:28 AM

Commercial real estate (“CRE”) private credit has a place in every portfolio, especially in the current economic environment, which is marked by peak prices, volatility, and slowing growth.  This asset class has gone from being virtually untracked 20 years ago to $60B in dry powder (raised but uninvested capital) in recent months.

Regulations on banks after the last financial crisis combined with new laws benefiting smaller investors have allowed this space to thrive in the last five years. Investors have discovered its appeal and we think it’s here to stay.  Before we dive into what investors are finding so compelling, let’s define what CRE private credit is.

CRE private credit is an asset class that consists of loans backed by commercial real estate properties. The properties act as the loans’ collateral such that, in the event a loan does not perform, the lender can take ownership of the property. This structure can increase security for a lender and reduce the risk of loss on an investment.

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Topics: Bridge Loans, Investors, Private Credit

A Bridge Lender's View of Opportunity Zone Financing

Posted by Jack Power & Charlie Dunlap on Aug 14, 2019 2:20:12 PM

Opportunity Zone investor incentives can sound compelling.  Where else can an investor receive increased returns (by paying little or no federal capital gain taxes) and at the same time help revitalize a local community?

Although Opportunity Zones provide substantial tax breaks for investors, they can be risky endeavors for bridge lenders and sponsors alike.  In this article, we will explain what Opportunity Zones are, why they were created, and how bridge lenders may approach their underwriting of projects within these zones.

What are Opportunity Zones?

Opportunity Zones (OZs) are designated areas throughout the United States that have been selected by state and federal agencies for economic revitalization.  In order to invest in OZs and receive federal tax breaks, investors must invest in a Qualified Opportunity Fund (“QOF”).  According to the legislation, a QOF is “any investment vehicle which is organized as a corporation or a partnership for the purpose of investing in qualified Opportunity Zone property…that holds at least 90 percent of its assets in qualified opportunity zone property.”  The legislation imposes a “substantial improvement” requirement on the QOF.  In order for an existing building to be designated as a qualified OZ project, the QOF is required to make improvements to the building in an amount equal to or in excess of the purchase cost of the building (less the land value).  Additionally, these improvements must be substantially completed within 30 months of the QOF’s purchase of the building.  As an example:

A Qualified Opportunity Fund buys a property for $1 million.  The land is worth $250,000 and the building is worth $750,000.

In this example, an additional $750,000 must be invested into the building within 30 months of the purchase date.

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Topics: Bridge Loans, Investors, Sponsors

Proptech is Making Waves in the Real Estate Industry

Posted by Jack Power on Aug 2, 2019 9:42:48 AM

As you may have read in the Real Estate Crowdfunding 101, 102, and 103 articles, crowdfunding is a relatively new phenomenon that has changed traditional methods of raising capital for real estate investments.  However, crowdfunding is just one piece of the larger picture: namely, that technological innovation is inherently disruptive.  How has this disruption affected the world of real estate elsewhere?

Historically, the real estate industry—particularly the commercial side—has been slow to adapt to rapid increases in technological innovation.  While other industries have welcomed innovation with open arms, real estate has not been so quick.  However, the efficiency and success in other industries have inspired many property technology companies (dubbed “proptech”) to quickly rise in the real estate world.  Although real estate has not caught up to other sectors quite yet, there has been a significant change in a relatively short amount of time.  This article will discuss some of the emerging trends in the real estate industry spurred by technological innovation.

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Topics: Crowdfunding

What Do Lenders Want to See in CRE Debt Packages?

Posted by Marcus Goodwin on Jun 12, 2019 10:59:43 AM

Obtaining commercial real estate debt financing is no easy task.  In certain scenarios, gathering and organizing the required information can be a monumental undertaking.  Many times, closing timeframes or difficult sellers can make it impossible.  However, when presenting an opportunity to a lender, the more information you can provide the better.  More importantly, you can expect more accurate feedback.  From a lender’s perspective, the overall focus or theme is “don’t lose.”  Because of this directive, lenders can be seen as “Debbie Downers” or “Negative Nellies”, seemingly unable to focus anywhere but on the downside scenario of the opportunity.  Because typical debt structures do not allow the lender to participate in the upside, the downside risks take the majority of the lender’s focus.  From this perspective, it is easy to see why lenders will tend to take a conservative approach.  As a broker (or sponsor), it is important to try and not let a lender replace missing information with overly negative assumptions (sometimes they just can’t help themselves).  A debt package that provides a complete picture of the opportunity will help manage any lender concerns upfront.  This allows the lender to focus on the business plan presented, rather than stalling out with questions about missing information. 

Below is an outline of important parts of any debt package that, when included, will help to keep the lender’s attention on the deal.

  1. Background
  2. Sources & Uses
  3. Capex Budget
  4. Historicals + Pro Forma
  5. Sponsor Background
  6. Market Data

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Topics: Brokers, Sponsors

Real Estate Crowdfunding 103: The World of Real Estate Crowdfunding Sites

Posted by Boots Dunlap on May 8, 2019 12:06:15 PM

In the last two articles in this series, we discussed two key differentiators in real estate crowdfunding: differentiation of platforms and differentiation of offerings

  • Differentiators in offering refer to the regulatory offering types (accredited vs non-accredited investor offerings), which are of the utmost importance to real estate sponsors thinking about raising capital online. 
  • Differentiators in platform refer to both the purpose (marketplace vs captive) and the incentives behind the platform, which is a critical investment due diligence item for anyone intending to invest through crowdfunding.

To date, the most successful real estate crowdfunding websites tend to be crowdfunding marketplaces focused on accredited investor offerings.  These include CrowdStreet.com, RealCrowd.com, and EquityMultiple.com.  Because these sites attract multiple sponsors (a marketplace) and can bring more money to real estate transactions (no fundraising cap), they garner the highest quality deals and attract the greatest quality and quantity of investors.  In addition, they protect their brand by vetting the deals and sponsors before permitting them to market their offerings on their platform. 

There has been a glut of crowdfunding platforms erected with the hopes of emerging as the real estate crowdfunding market leader.  However, this glut has outpaced user-adoption.  As a result, numerous crowdfunding companies have closed down or consolidated as they have struggled to generate the fee income required to outpace their large overhead. 

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Topics: Investment, Investors, Crowdfunding

How Do Interest Rates Change at Different LTVs for a Typical CRE Bridge Loan?

Posted by Ted Van Brunt on May 1, 2019 10:29:51 AM

In December 2018, RRA Capital conducted an annual mortgage broker survey to explore how interest rate pricing changes at different leverage points for a typical commercial real estate (CRE) bridge loan.  The inspiration for this survey came from the desire to give borrowers the sharpest pricing we can at different LTV exposures by getting a better idea of current market pricing.

For the purposes of this survey, a “typical commercial real estate bridge loan” was assumed to be the following:

  • Debt Assumptions: Acquisition financing, non-recourse, 2-year term
  • Property Assumptions: General multi-tenant commercial property, class B, partially-stabilized, $15 million value
  • Borrower Assumptions: Has experience in the product type, good credit, an acceptable net worth as limited guarantor and ability to accept leverage between 40%-95% LTV
  • Market Assumptions: Well-located, infill location, in a stable secondary market


The below chart displays the survey results, which came from some of the most active mortgage brokers across the United States.  The black bold line in the middle is what RRA extrapolated to be a good average rate (internally referred to as the “Yield Curve”).  More specifically, the black line is the exponential trend line of the rate of change between the data points.  And to control for some outlying data, any data points where either the rate of change or the rate of acceleration were more than two standard deviations from the mean of the sample were excluded.

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Topics: Market Update

Real Estate Crowdfunding 102: What Investors Should Know

Posted by Boots Dunlap on Apr 4, 2019 2:22:15 PM

In the previous post on real estate crowdfunding, we covered the regulatory structures of crowdfunding offerings and the impact that those offerings have on sponsors.  In this post, we’ll look at two distinctly different types of crowdfunding platforms that every investor should be aware of and how each affects the investor’s ability to find great deals.  The differentiators discussed below expose the business strategies, and more importantly the incentives, behind crowdfunding platforms that impact the investor.

There are two major types of crowdfunding platforms: crowdfunding marketplaces and captive crowdfunding sites

  • Crowdfunding marketplaces are websites built to be a truly independent and free marketplace for investors and sponsors.  The crowdfunding marketplaces are created to provide the investor community with deals from numerous sponsors, most often pre-approved for quality control. 
  • Captive crowdfunding sites are sites created by a real estate sponsor to satisfy a specific business need.  They do not necessarily find the investor the absolute best deal in the available market.
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Topics: Investors, Crowdfunding

Real Estate Crowdfunding 101: What Sponsors Need to Understand

Posted by Boots Dunlap on Mar 20, 2019 11:48:17 AM

Real estate crowdfunding has been quietly evolving on the sidelines during the latest commercial real estate bull market.  Critics dismissed this new form of capital raising as just another fad or buzzword du jour.  However, crowdfunding platform founders claim that it is destined to overtake traditional capitalization methods in the not too distant future.  Regardless, the major objections to crowdfunding are dissipating rapidly as advancements in supporting technology trends (to be discussed in a subsequent post) allow for greater investment transparency and growing user-adoption.  As this industry matures, real estate investors and sponsors will be able to connect more efficiently, creating greater competition for capital and deals.  This increased efficiency and competition will result in a broader demand for quality deals and cheap equity.  However, before market participants may hope to reap these benefits, they should first be aware of the basics of crowdfunding.

Over the course of a series of posts, I intend to cover some of the key differentiators of crowdfunding platforms that affect investors and sponsors.  These consist of two major areas: differentiation of platforms and differentiation of offerings.  While both platforms and offerings have significant effects on both investors and sponsors, investors should be more concerned with understanding the platform, and sponsors with understanding the offering.

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Topics: Private Credit, Sponsors, Crowdfunding

Counting the Costs When Purchasing a 25-Year or Older Building - Part 3

Posted by Charlie Dunlap on Mar 11, 2019 9:51:50 AM

In Part 1 and Part 2 of this series, we discussed the definitions as well as what factors decrease the useful and physical life of a commercial building.  In this article, we examine a specific property type of commercial real estate that has important deviations from a “typical” older commercial property: residential rental property.  We will explore why residential rental buildings (primarily apartments) have shorter economic useful life expectancies and what the main limiting factors in extending a property’s economic useful life is.

Economic Life of an Apartment is 27.5 Years

When considering the purchase of an older residential rental property (such as an apartment) it is important to understand that the useful economic life of an apartment building is significantly shorter than that of a commercial building.

As a reminder, the IRS allows 27.5 years over which you can depreciate residential rental buildings and 39 years for retail and other commercial structures.  This shorter depreciation schedule was established to encourage construction of new rental housing, however, it also reflects the fact that residential rental structures have a significantly shorter useful lifespan than commercial structures.  The tax code presumes that the useful life of a residential rental building is only 70% of the useful life expectancy of a commercial building.

What factors contribute to a shorter useful life for residential rental housing properties?

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Topics: Sponsors

Counting the Costs When Purchasing a 25-Year or Older Building - Part 2

Posted by Charlie Dunlap on Feb 22, 2019 12:38:01 PM

In Part 1 of this series, we discussed what the useful and physical life of a commercial building is, as well as the five stages of a building's life.  In this article, we will explore some of the factors that can decrease the physical and useful life of a commercial building. We will also touch on building obsolescence, which can be a major threat to older buildings.

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Topics: Sponsors