Published in Finance

Real estate bridge loan fund picks up traction

BY Sunday, March 17, 2019 09:05pm

GRAND RAPIDS — A capital fund providing commercial real estate bridge loans raised more than $11 million from investors in its first few months and closed on transactions with three borrowers.

Red Oak Capital GP LLC of Grand Rapids continues to close monthly on investments from new investors en route to a goal of raising $50 million through a bond offering by the end of 2019, with two six-month extensions if needed. The capital raised goes to a national fund that provides senior lines of credit for commercial real estate deals that do not yet qualify for bank financing.

Joe Elias, Red Oak Capital

Much of the $11 million raised as of late February from bond investors went to finance deals for two retail locations in Grand Rapids, an office building in Houston, Texas, and a Hilton hotel in Virginia, just outside of Washington, D.C., said Joe Elias, a senior partner at Red Oak Capital.

Loans are pending for transactions in Detroit, as well as in Ohio, Indiana, Kansas and Texas, Elias said. Most loan prospects come from bank referrals.

The pipeline of investors continues to grow even as Red Oak Capital Fund II LLC remains in its early stages. The next closing scheduled for later this month with prospective investors “is setting up to be a significant close for us,” Elias said.

“We anticipate and we’re working hard to get to that $50 million,” Elias told MiBiz. “We’re kind of hitting our stride now with knowing the capital that is coming in. Seeing what is coming in, we’re able to build a better cadence of generating deal flow and closing on these deals.”

Using an electronic platform that automates much of the process, Red Oak Capital has worked through registered investment advisers and broker-dealers nationally to raise the fund. The firm has two large broker-dealers that it expects to sign selling agreements with, on top of the 14 already in place, “and those people could actually take us way over the top,” Elias said.

The fund wants to have about 25 signed selling agreements with investment advisers and broker-dealers, Elias said.

Red Oak Capital Fund II, which followed an earlier $30 million fund, provides bridge loans of between $500,000 and $5 million. The fund will hold a loan for 12 months or so, and after stabilizing the property, cash out and turn the borrower back over to the bank.

Loans typically are for commercial real estate transactions that can’t get bank financing because, for example, a property’s occupancy rate is too low, or the borrower has other issues such as a divorce or problems with a business partner. Properties typically are in “good standing, it just got into a bad circumstance,” Elias said.

Red Oak Capital has attracted about 125 investors so far who put money into the second fund. Investors have come from “all over the place” across the country, Elias said. Many investors who put money in “are hungry for a fixed-income model higher than what they’re getting today and (that) does not have the volatility of the stock market,” Elias said, noting they also want some downside protection.

“The thing is there’s just not a lot of product out there that is available for them,” he said.

Attracting capital

Red Oak Capital pursues additional investors and deals as economic outlooks generally predict an easing in U.S. economic growth in 2019.

Commercial real estate lending during the final three months of 2018 remained strong, despite the volatility in December from investors’ anxiety over rising interest rates, stock market volatility and slower corporate earnings, according to a January report from brokerage firm CBRE Group Inc. Firms in the commercial real estate industry “appear to have weathered the storm well,” according to a CBRE quarterly report on commercial real estate lending.

The firm noted that “large amounts” of private investments have been raised for bridge funds, construction loans and secondary financings, resulting in increased loan originations.

Looking ahead, a CBRE Group outlook issued in December said that “U.S. commercial real estate fundamentals remain positive” and that “an abundance of available capital should continue flowing” into the market in 2019.

Economy as a barrier?

Elias views concerns about the economy as probably the biggest barrier for Red Oak Capital right now. However, even if the economy were to slide into a downturn at some point in the future, that could lead to business opportunities for Red Oak Capital as banks responding to the economic conditions refer prospective commercial real estate borrowers to them for a bridge loan.

“It plays for us,” Elias said. “Any type of bank tightening helps us greatly because banks, even though they’re tightening up their standards, they’ll flow more deals to us. If we’re able to stabilize it to their standards, they’ll take it back.”

Once Red Oak Capital reaches $20 million to $25 million, it will begin work to create a third fund.

“We’re going to kind of look at the market and see what the appetite is,” Elias said.

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