W Financial goes Institutional: Fund II launch slated for Fall 2007

The same borrower who will, of course, choose a 10-year bank or CMBS mortgage with a low, fixed rate for a stabilized, income-producing property, will at other times (usually upon acquisition or conversion from one purpose to another, such as office to residential) choose to utilize a short term, high-yield bridge loan that can close within a week or two (rather than the 2 or 3 month time frame of a typical bank loan). The value proposition from the developer/owner’s perspective goes something like this: “Private money is more expensive but far more flexible, creative and nimble.” The private lender can close within a very short time frame allowing the borrower to negotiate the deal and definitively close on the property, then add or create value, and finally refinance with a bank once the business plan has been executed. Sophisticated commercial mortgage brokers certainly understand the value of short term private mortgages. A six to twelve month private bridge loan can give the broker ample time to orchestrate and optimize the entire capital stack which may include senior debt, mezzanine debt, preferred equity or a joint venture. This is especially true when an initial closing must occur before all building plans are completed and approvals are in place.

There may have been a point in time many years ago when there may have been a stigma attached to utilizing high yield loans, but those days are forever gone. Now short term private mortgages are just another tool in the real estate owner’s toolbox. Depending upon the available time frame, cash flow and other factors, the borrower will reach for the appropriate tool to get the job done.

For a long time institutional investors considered real estate-backed, high-yield bridge lending to be something of an ugly duckling, and relegated it to a remote corner of their investment universe. However, over the last year or so institutional investors are paying close attention to the asset-backed lending (ABL) space. As they gain greater familiarity with the private lending space, (and as private mortgage funds have evolved and become more and more “institutional” in their approach, due diligence and methodology), institutional investors have begun to see that a disciplined, well-run fund can produce steady returns in the area of 1% net per month, with very low volatility and very little correlation to the stock and bond markets. In a fund with a) robust sources of new loan opportunities, b) deep market knowledge, and c) thorough and effective due diligence (on both properties and principals), private mortgage fund managers can make good use of the many inefficiencies inherent in commercial real estate. The key for the manager of a private mortgage fund, as with any investment strategy, is maintaining discipline and focus and operating in a “target-rich environment” with ample opportunities to choose from.

W Financial has a two-year lock-up and a five-year investment period. Although the fund was originally created for just 20 high-net worth individuals, it has since grown to accommodate more than 80 individuals and families. We have decided to launch Fund II because of numerous requests from institutional investors that have said, “we like what you are doing, we like your track record and we like the fact that you have no defaults or foreclosures, but we cannot live with Fund I’s two-year lock-up”. While the two year lockup and five year time horizon of Fund I is clearly acceptable to the nearly eighty high net worth individuals and families who are the current investors, institutional investors typically require greater liquidity.

While institutional investors like the solid collateral that underlies the loans, and  like the powerful rights and remedies that a mortgage lien confers, on the other hand institutional investors are not overly enamored about the fact that bridge loans are not very liquid. Institutional investors who decide they are interested in mortgage funds have to be comfortable with the fact that while solid and backed by powerful rights and remedies, mortgages are never going to be an absolutely liquid investment.

The target for W Financial II is $250 million with a $1 million minimum and a 2 and 20 structure (2% management fee, a 20% incentive allocation). Fund II plans to invest alongside Fund I,  pari-passu, based on assets under management. Fund II will focus on the shorter term loan opportunities (two years or less), while Fund I will continue to make loans as long as five years.

For more information visit the Fund’s borrower portal (www.w-financial.com) and for information about investing in Private Mortgage Funds visit (www.PrivateMortgageInvestment.com).

© 2008. Gregg Winter. All Rights Reserved.
Unauthorized use of this material may violate copyright, trademark, and other laws.

1 | 2