GRAND RAPIDS — Red Oak Capital Group LLC plans to raise another $50 million through a public bond offering for a third fund to offer bridge loans for commercial real estate.
The creation of Red Oak Capital Fund III LLC follows the firm’s two prior funds, the latest of which closed this past summer after reaching $50 million. Seeing continued demand from prospective borrowers and investors, Red Oak Capital Group pursued the formation of a third fund.
“There was just a huge appetite for it,” said Joe Elias, a senior partner at Red Oak Capital. “We anticipate the fund being full probably within six months and then we’ll have to be coming out with another one.”
Red Oak Capital is pursuing its third fund under federal Regulation A+. The fund netted $6 million from investors within nine days after it was qualified Sept. 18 by the U.S. Securities and Exchange Commission, Elias said.
As with prior funds, Red Oak Capital Fund III provides commercial real estate bridge loans for properties whose owners need credit but can’t qualify for bank financing because of any number of reasons or unique circumstances.
Fund III will provide loans of up to $7.5 million, up from the cap of $6 million in prior funds, although “we’re going to keep those to a minimum,” Elias said. Loans in the two previous funds averaged $2.5 million to $3 million, he said.
Red Oak writes bridge loans for 12 months, with two six-month renewals, then works with the borrower to upgrade and position the property for subsequent bank financing with a traditional commercial lender.
Since forming Fund II with a public bond offering in 2018, Red Oak Capital has provided 11 bridge loans in markets across the country and expects to close soon on two more loans, depleting the fund, Elias said.
Many of the loans were with borrowers whose banks referred them to Red Oak, Elias said.
“Then we underwrite to their specifications. We say, ‘OK, bank, what do you need to take this loan back? What is going to work for you?’” Elias said. “We’re able to provide value to where it needs to be provided, but we also work heavily on the exit strategy. As fast as we get people into our loans, we try to get them out of our loans. We try to get them into bank financing as fast as possible.”
Fund II attracted a little more than 1,170 investors, some of whom wanted to put money into bonds amid continued volatility in the stock market, Elias said. Fund II closed two months earlier than expected, he said.
“They felt confident about the assets we were investing in,” Elias said. “A lot of people were looking at the market as (being) volatile, but it’s been pretty consistent for the last year. There was just a lot of uncertainty with that.”
That interest in alternative investments is consistent with what Ray Llewellyn, a financial adviser at the Grand Rapids office of ARGI Financial Group LLC, has experienced in the market.
“We have seen clients asking for alternatives to equity to decrease volatility in their portfolio,” Llewellyn wrote in an email to MiBiz. “What makes these types of securities attractive is the ability to earn yield in our current low-yield environment. Obviously these investments are not for everyone and it’s important to complete your due diligence before investing.”
Red Oak’s prior funds secured investments primarily from accredited and non-accredited investors. In Fund III, the firm seeks to add to the mix with institutional investors such as family offices to diversify its capital base, Elias said.
Once the new fund is fully raised and deployed, Red Oak will look to form a fourth fund, probably in 2020, he said.
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