GRAND RAPIDS — Red Oak Capital GP LLC wants to capitalize on the strong economy by seeking investors for a new fund that will offer senior lines of credit for commercial real estate deals.
Red Oak Capital Fund II LLC plans a public bond issuance of up to $50 million and will use the proceeds to originate commercial mortgage loans and acquire senior debts, according to a filing with federal securities regulators.
The fund will target what Red Oak Capital Senior Partner Joe Elias calls the “sweet spot” of bridge lending nationally in commercial real estate deals that do not qualify for bank financing because of any number of reasons or unique circumstances.
Elias cites as an example a buyer acquiring commercial real estate that has been held for many years by a previous owner. The building has potential but needs rehabilitation or perhaps has an occupancy rate below what a bank requires for the buyer to secure financing for the deal.
That’s where Red Oak Capital can come into play. The fund will do bridge loans of between $500,000 and $4 million and expects to hold loans an average of 16 months before exiting. Contractually, Red Oak Capital would hold a loan for 12 months with two six-month extensions before an exit.
Formation of the new fund follows Red Oak Capital’s first fund two years ago that raised $30 million in a private placement with accredited investors. The prior fund has since been fully deployed over six deals that include office, retail and multifamily real estate.
While the economy and commercial real estate markets remain in good shape, the firm followed up with the larger Red Oak Capital Fund II that will involve the public issuance of Series A and Series B bonds.
“Fund I is now closed and we still have a lot of deal flow coming in and lot of stuff still to move. The economy is doing really well and commercial real estate, in certain pockets, is still reasonably priced,” Elias said. “Right now, there’s a lot of volume, and there’s a lot of opportunity, and the economy is still growing.”
A July report by CBRE Group Inc. said commercial real estate lending in the U.S. “remains robust,” despite some volatility in financial markets and tension over foreign trade. A quarterly index compiled by CBRE was unchanged for the second quarter, according to the July report that said commercial real estate mortgage lending should remain favorable for the rest of 2018.
Even if the U.S. economy were to begin to falter and the commercial real estate markets followed suit, Red Oak Capital can quickly adjust to market conditions, Elias said.
“We feel like this industry that we’re in, regardless of economy or recession, we’ll be able to fund the right loans that work for us, as well as our investors and our take-out partners,” he said. “Even if the economy does dip, we can change almost on a dime to get our funds deployed in the areas that make the most sense for us.”
Red Oak Capital expects to secure U.S. Securities and Exchange Commission approval early this month for the public bond issuance. The firm seeks investors through representatives at about 10 broker-dealers locally and across the country. The fund has a minimum investment of $10,000.
“We have a ton of interest in this and we’ve been invited to speak to a lot of different conferences about what we’re doing,” Elias said.
Among the potential draws are the SEC requirements in a public bond offering that create accountability with regular audits. As well, Red Oak Capital’s technology platform streamlines reporting to investors and offers an underwriting process that follows bank standards. Another draw for investors: The company generated an 11.3-percent average return on investment from the first fund.
Red Oak Capital created and opened Fund II to accredited and non-accredited retail investors “because we wanted to have a wider audience and build a better source of investors and a more in-depth source of investors, and hopefully stickier people,” Elias said.
“If we do our jobs as good fund managers, hopefully we’ll have lifers that stay with us. We want to build a relationship with our investors and broker-dealers,” he said. “We don’t want to be a flash in the pan.”
Elias and his partners have already met with some of the 26 investors from the first fund about investing in Fund II.
“They want a part of Fund II as well just because we’ve been able to perform well on Fund I,” he said. “Our investors are making a great return on Fund I.”