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Press, Real Estate
Flattening Credit Curve Spurs Demand For Mezzanine Debt

A flattening credit curve is leading to greater demand for mezzanine debt among commercial real estate borrowers. “When the credit curve is steep, each incremental dollar of debt is expensive. When it is flat-and it has flattened quite a bit-there will be even more pressure among borrowers to put leverage on, ” said a lender at an insurance company.


The last time credit curve saw substantial flattening was in 2006-2007, when BBB-rated CMBS were in the range of swaps plus 85, and AAA-rated, super-senior bonds were trading at swaps plus 60. While the differential isn’t as narrow right now-BBB bonds are at around swaps plus 272, while AAA bonds are at 52-it’s substantially flatter than when BBB-rated bonds were trading at swaps plus 800- 900 at the height of the credit crisis, market players told REFI.


CIT Real Estate Finance started to see more borrower requests for mezzanine debt at the start of the year. “It’s a function of developers wanting to put in as little equity as possible,” said Matt Galligan, president. “As the years have gone by, the spreads on mezzanine debt have diminished. Spreads are 8-12%, depending on risk, and the number of mezzanine lenders is amazing.”


Market players told REFI the capital structure has been capping out at 85%, with the bank market at 65-70% and the mezzanine market at 15%. For floating-rate loans, borrowers are seeing pricing of about 3-3.5% all in.


From a borrower’s perspective, the choice to tap the mezzanine market is easy to understand, said Andrew Kirsh, co-founder of law firm Sklar Kirsh, which works with commercial real estate borrowers and lenders. “If you can get a 65% senior loan and finance a portion of the remaining 35% with additional debt, a mezzanine loan is generally less expensive than equity,” he said, noting that mezzanine lenders also don’t share in the profits the way equity investors do. “When borrowers take on mezzanine debt, they have to act on their business plan efficiently and effectively because it’s like there’s a gun pointed to them that is fired every month,” he added.

Karlin Real Estate, which mainly targets transitional assets, has been getting more requests in recent months for mezzanine loans of three to five years where the sponsor is taking some lease-up or rehab risk, said Larry Grantham, managing director.


Rick Jones, a partner at law firm Dechert, noted a concern in today’s market is the amount of capital chasing transactions, particularly on the subordinate debt side. “It’s hard to make money anywhere across the capital stack. Margins are being compressed and people are running harder to make as much money as they made last year. Last year, we were all geniuses. This year, it’s no longer easy,” he said.

Press, Real Estate
Crowdfunding Players Look to Expand Reach to Real Estate Funds

Players in the nascent commercial real estate crowdfunding sector are looking to expand into the commingled fund business.


Sponsors in the sector have generally raised capital from individual accredited investors and invested that in single properties, < often through operating partners. They identify potential investments, raise capital from screened investors and manage the distribution of investment returns to investors. They’re now expanding into real estate funds.


Realty Mogul of Los Angeles has been leading the charge and has already raised equity that was invested in a number of funds. For instance, it raised $3 million of the $20 million raised by a fund, Affordable Housing Community Fund 4 LLC, that was sponsored by Dave Reynolds, a Cedaredge, Colo., mobile-home park specialist. It buys manufactured housing communities across the country.


Jilliene Helman, Realty Mogul’s chief executive, anticipates expanding to include raising capital that would be invested in funds pursing opportunities in the multifamily, office, retail and self-storage sectors.


She expects Realty Mogul to raise $2 million to $5 million of equity for each of the funds in which it would invest.


Investors participating in Realty Mogul’s offerings would become members of a limitedliability company that then would invest in the funds it targets. So, although each LLC could represent dozens of investors, the funds that get their equity would deal with only one investor.


Since the investment funds that Realty Mogul would back could be as small as $20 million in total equity, its commitments could account for a sizeable 10 percent or more of their total equity. However, Helman expects to ultimately also raise equity for some slightly larger funds as well.


“We’ll be able to get those funds to reach out to thousands of investors they could not reach otherwise and we’ll be letting our investors get further diversification,” she said.


Realty Mogul, with about 10,000 accredited investors registered on its site, has raised some $25 million of equity for real estate investments since it was founded early last year.


Among its individual property deals, it provided $3.5 million, or 80 percent of the equity that a San Francisco area investor used in a $15 million acquisition of a shopping center in that city, and it provided $1.5 million or 17 percent of the equity used in the purchase and renovation of a Palm Springs, Calif., hotel. CrowdStreet Inc., another crowdfunding operation, plans to soon start targeting investments in funds. Darren Powderly, co-founder of the Portland, Ore., company, said it soon will raise equity that would be invested in one property fund and would be raising equity for others.


It will likely raise $1 million to $2 million for the funds in which it would invest. It would raise its capital in increments of $25,000 to $50,000 from its registered investors.


Both Powderly and Helman are looking to raise equity for real estate investment managers that have at least about $100 million of total assets under management. CrowdStreet may make exceptions for smaller managers that have funds with distinctive investment strategies.


Their success with funds could pave the way for other crowdfunders to expand in that area.


Crowdfunders typically are paid fees by the sponsors of the investments for which they raise equity.


However, there are less than 20 established real estate sector crowdfunders, by most accounts, while only a handful have completed deals and most have been for small amounts.


Among the established players, Fundrise of Washington, D.C, is in the market raising equity for deals that include a planned $450,000 investment in a mixed-used redevelopment in Brooklyn, N.Y.


Despite the relatively small amounts of equity being raised, the market of accredited investors is vast. There were 8.6 million households in the United States with net worths of at least $1 million in 2011, according to Spectrem Group, a Chicago research firm.


Meanwhile, the crowdfunding market could dramatically increase in size as a result of a regulatory proposal that would allow even non-accredited investors to participate in sponsored investments.


Crowdfunding, which also is used to raise equity for investments in other types of business projects, was provided for by the Jumpstart Our Business Startups, or Jobs ct of 2012. The law’s final regulations, including the expansion to non-accredited investors are being prepared by the SEC.


The final regulations could also make crowdfunding tougher by requiring sponsors of investments to disclose additional information about their operations, and setting requirements for crowdfunders that opt to also market to non-accredited investors.


Whether accredited investors will flock to crowdfunding sites in order to invest in commingled funds remains to be seen. Many funds already reach out to them directly and through registered investment advisors or financial counselors.


“As an investor, it’s a question of who do you want to take your advice from in deciding which funds to invest in,” said Shawn Haghighi, a partner in the real estate practice of the Sklar Kirsh law firm in Los Angeles, whose clients include crowdfund operators and investment fund managers. “Crowdfunding sites are for the most part new to the game, and the question would be whether they have the right professionals to pick the best fund managers, or do you go to an investment consultant who’s been doing this for some time.”

Press, Real Estate
NoHo Haul

A live/work loft complex in North Hollywood sold last week for almost twice as much as it went for just two years ago.


L.A. real estate firm Vista Investment Group bought the 68?unit complex at 5255 Cartwright Ave., known as the NoHo Lofts, for $18.7 million, or about $275,000 a unit. The seller, Westwood investment firm CityView, made a hefty profit on the property: It originally purchased the complex out of foreclosure in 2012 for less than $9.9 million.


The former warehouse in the North Hollywood Arts District was built in 1958 and converted into luxury Live/work units in 2006. It has one and two level units with polish concrete floors and 25 foot ceilings. The building, about 97 percent occupied at the time of sale, is occupied by a variety of artists and business owners who work in industries such as graphic design, music, architecture, advertising and postproduction. The units are not subject to rent control.


Jonathan Barach, president of Vista, said his firm will invest an undisclosed amount of capital into upgrading unit interiors and shared building amenities, such as fitness center, club room and rooftop deck.


“Through thoughtful branding, contemporary updates and active participation in the community, we plan to become the destination among artists and innovators in the Arts District.” he said.


Andrew Kirsh, a partner at Century City law firm Sklar Kirsh who advises Vista, said the purchase also includes a 15,200 square foot parcel of land across the street at 5354 Denny Ave., which is fully entitled for up to 20 more units and 80 parking spots.


“Our clients were attracted to this asset class because of the higher returns they can achieve compared to traditional multifamily.” he said.


Kitty Wallace of Colliers International represented both the buyer and seller in the deal.

Press, Real Estate
The Next Biggest Thing for Downtown Is…

Key players in Downtown’s revitalization stopped by Bisnow’s Evolution of Downtown Summit on Friday at the LA Marriott LA Live. Just when we thought things were going well, we learn we’re not different than Anchorage, Alaska.


Sklar Kirsh founding partner Andrew Kirsh, our moderator, kicked off the program with some interesting stats. The median age of Downtown’s 52,400 residents is 34 and the median household income is nearly $100k. But what’s really interesting is that 44% work somewhere else. “They’re choosing to live Downtown for what Downtown has to offer.” (Or they just want to get as far away from their coworkers as possible.) There’s still a lot of room for growth, he adds; the number of residents in Downtown LA is the same or less than Anchorage, Alaska.


The Ratkovich Co CEO Wayne Ratkovich says “There’s a history of people coming to Downtown,” and we’re coming back to the idea that the region wants a centerpoint. The Bloc, his company’s redevelopment of Macy’s Plaza, will be one of the few truly mixed-use projects in LA: a 495-room Sheraton hotel upgraded to four-star status; 400k SF of retail, now open to the street and including some entirely new tenants; 757k SF office building rehab; and 2,000 cars all on one parcel. (That’s pretty much every asset class. Throw in a fan, and we’ll count it as cold-storage industrial.)


EVP Bert Dezzutti explained Brookfield Office Properties’ acquisition of the MPG assets: The company operates in a limited number of cities that offer future office-using job growth, and a similar cycle has occurred in these cities. Adaptive reuse has been the catalyst, resulting in increased housing density, which then drives retail and entertainment; at the tail end, the office building industry gets going. Downtown LA is in the early stages of that recovery, but “we’re beginning to see job growth.”


OUE’s CEO of Americas business Richard Stockton says part of the firm’s plan for the US Bank Tower is to introduce change and make it more exciting. (Take the recent opening of an event space on the 71st floor.) The purchase allows the Singapore-based company to start a US platform across a number of asset classes: hotel, shopping centers, and residential, in addition to office.


CEO Martin Caverly says EVOQ Properties is transforming Alameda Square into a fashion innovation campus. If you draw a circle around the project, he says, there are 17 well-known brands selling everything from $50 t-shirts to $500 jeans. (To save money, we’ll just buy a second shirt and wrap it around our waist.) Weighing in on the traditional office vs creative space debate, Martin says the worst thing you can do in a Class-A tower is rip out your ceiling tiles. Eventually, creative tenants mature and “they want to get away from the guy with the skateboard.”


CBRE SVP John Zanetos talked about TED: a new breed of tenant (tech, entertainment, design) coming into Downtown, driven by residential development. He sees rent growth in historic product—Alameda Square rents have more than quadrupled over the past five years—and migration from other submarkets. According to John, both traditional high-rise and creative office tenants are drawn to urban centers where they can have a phenomenal neighborhood experience. “That’s what’s going to help continue the office demand.”


Bert says that when Brookfield was redeveloping Figat7th, its first thesis was that food follows fashion. Instead, the reverse happened. Food has become a cultural driver, thanks to Food Network and social media. Wayne notes that by 2024, 70% of the workforce will be Millennials. Other useful catalysts: transportation and better quality hotel stock. Martin asks why we have so much trouble getting subways built, noting a subway from Downtown to Century City would help fill in the Wilshire Corridor

Press, Real Estate
Lenders Follow Investors to Smaller Markets

Investors are returning to smaller cities such as Provo, Utah and Clarksville, Ind. in search of fresh opportunities and higher yields. And they are pulling lenders along with them.


Debt and equity financing available for deals in tertiary markets is far from free flowing. Yet there is a growing pool of lenders willing to do those deals.


“The market is opening up. It is not as open as financing in the core markets, but it is better than it was three years ago,” says Andrew Kirsh, co-managing partner and head of the real estate practice for Sklar Kirsh LLP, a Los-Angeles-based law firm. “There are a lot of options for a borrower and an operator.”


Capital sources pulled back from tertiary markets in the wake of the economic downturn. There was a good deal of concern in the lending community that the economy would not bounce back nearly as quickly in the markets that didn’t have a broad employment base and foreseeable growth. So lenders were essentially “redlining” the smaller areas, notes Jeff Hudson, CEO of George Elkins Mortgage Banking Co. in Los Angeles. “A number of lenders even said: ‘don’t bring us anything with an MSA less than 50,000 or 100,000 people,’” he adds.


Now many lenders are reversing those decisions as the economy improves and they are facing more competition in primary and secondary markets and a desire to capture higher yields. That is not to say that lenders are as eager to finance a property in Athens, Ga. as they are to finance a property in Newport Beach, Calif.


“They will look at their underwriting under different parameters and evaluate the trends with more depth. But at the end of the day, they will make loans,” says Hudson.

George Elkins has recently arranged financing on transactions in Clarksville, Ind.; Rapid City, S.D.; and Prescott, Ariz.


The pioneers


Lenders across the board, including banks, life companies, government agencies, CMBS and non-conventional lenders and funds, are all dipping their toes back into tertiary markets—at least to some degree. That being said, drill down into those different groups and the list of who is actually active in tertiary markets remains very selective. Some lenders are pulled into tertiary markets solely by relationships with existing borrowers. In the case of banks, for example, lending in tertiary markets is largely dominated by local and regional operators versus the nationals.


The majority of lenders have seen budgets increase in 2014, meaning they have more capital to place. CMBS lenders in particular seem to have an insatiable appetite to do new deals, largely because there is a more robust market of B piece buyers, notes Hudson. George Elkins recently helped to arrange $7 million in CMBS financing for a retail project in Tupelo, Miss. that includes tenants such as TJ Maxx, Hobby Lobby and Office Max. Most CMBS lenders won’t go into extremely small markets, but they are becoming more aggressive and are willing to do deals in markets upwards of 50,000 people if there are strong credit tenants and a good predictability of cash flow, he says.


However, tertiary markets remain more challenging than primary or secondary cities. Lender options are limited and financing rates are higher compared to deals in core markets. Leverage in these tertiary markets is often more conservative than leverage in the core markets. Deals also are getting more scrutiny as lenders look to get comfortable with the risks they are taking.


Karlin Real Estate is going where the opportunities are and it just so happens that some of those opportunities are surfacing in smaller cities such as Jackson, Wyo. and Crown Point, Ind. “We recognize inherently that there is more risk in these secondary and tertiary markets where you may have less macro demand,” says Larry Grantham, a managing director at Karlin Real Estate in Los Angeles. But at this point in the cycle, Karlin is willing to trade the risk for the higher returns that the secondary and tertiary cities offer in an improving economy.


Karlin has invested over $1 billion in the past few years in both equity and debt, providing senior and mezzanine bridge debt to borrowers who are buying transitional assets.


“It is so competitive in these primary markets that investors like us and others are struggling with whether or not we are getting paid appropriately for the risk we are taking,” says Grantham. “That’s where you start to get a little more comfortable in some of these secondary and tertiary markets.”

Press, Real Estate
Whitley House in Hollywood converted to micro-apartments and sold.

In Hollywood, a 1920s hotel-turnedapartment-building called the Whitley House has been sold for nearly $15 million.


The six-story building at 1963 N. Cahuenga Blvd. has 100 apartments, most of which are considered “micro-units” because they are about 250 square feet in size. The Whitley House was sold by Vista Investment Group, which acquired it in a lender-facilitated sale in 2010.


The property had been in the early stages of a major renovation that stalled during the recent economic downturn and was in a general state of disrepair, the seller said.


The building’s location in the midst of Hollywood and its original design as a hotel made it a candidate to be turned into a micro-unit property, according to Vista President Jonathan Barach.


HOME PRICES: Southland market stagnant in February


“There certainly is a market for these micro-units in high-density cities like Manhattan, San Francisco and parts of L.A. like Hollywood and the Westside,” Barach said. “It allows renters access to well designed, well-located apartment buildings at a price point not otherwise available.”


Mico-units typically appeal to renters who are young singles or couples who that cannot afford the rent that larger units in the same area command.


“Vista created tremendous value in its ability to take a tired asset with great bones and modernize it for the needs of younger renters who are willing to give up space to be in the middle of the action,” said attorney Andrew Kirsh of Sklar Kirsh, who represents Vista Investment Group.


The off-market transaction was brokered by Darin Beebower of Madison Partners.


Vista said the buyer was a private investor.

Press, Real Estate
Sklar Kirsh advises buyer in $15.75 million Koreatown purchase

Sklar Kirsh LLP represented GKT-Wilshire-CA LLC in its $15.75 million purchase of The Shops at Mercury located at 3800 Wilshire Blvd. in Los Angeles.


Los Angeles-based of counsel Albert C. Valencia led the Sklar Kirsh team, which included partner Mark C. Nicoletti, associate Michael J. Floryan and real estate specialist Tina A. Leggbellossi. The buyer, GKT-Wilshire-CA, is a subsidiary of Texas-based real estate and property owner USA Gateway Inc.


Three individuals worked together to operate as the seller in the deal. Moo Kwon, Myoung Kwon and Hee Shung Lee were advised by lawyers from different firms. Their broker was Eric P. Wohl of Hanley Investment Group.


The 23,191 square-foot property houses a Wells Fargo branch as well as retail shops including T-Mobile, and the Coffee Bean & Tea Leaf. It’s located across the street from the Pellissier Building and Wiltern Theatre in the city’s Koreatown district.


The property sits below a 238-unit residential condominium complex.


-David Ruiz

Press, Real Estate
The Rise of Playa Vista

Bisnow’s Silicon Beach: The Rise of Playa Vista, drew a record 500 last week to hear two extraordinary panels discuss this burgeoning enclave. Amazingly they came in business suits, not bathing suits.


Lincoln Property hosted our event at its about-to-be revolutionized building, Latitude 34, in the heart of where Howard Hughes used to hang out. Built as a spec development in 2009, it’s undergoing a $10M makeover to become the latest statement for the creative workforce. Think individual entryways even to the upper floors, indoor/outdoor connections, patios, a warmer, more textured environment, and a green wall on the parking structure, according to Gensler’s Michael White. (They could make the green wall a green screen so employees can shoot YouTube videos there.)


Moderator Andrew Kirsh, one of the founding partners of law firm Sklar Kirsh, has been heavily involved repping clients in Playa Vista and throughout Silicon Beach, working with groups like Pacshore Partners.

Press, Real Estate
Sklar Kirsh on LA Times

A subsidiary of Lehman Bros. Holdings Inc. has sold the Serrano Apartment Homes in West Covina to BAG Investments of Beverly Hills for $29.4 million.


Built in 1959, the Serrano has nine two-story garden-style buildings housing 195 two-bedroom, one-bath units. The complex, which is on a nine-acre site at 1513 W. San Bernardino Road, also includes two pools, basketball courts, a picnic area and laundry facility.


Lehman acquired the property in September 2012 through foreclosure proceedings, according to Andrew Kirsh, an attorney who helped represent Lehman in the transaction.


“Lenders who elected not to sell properties that they foreclosed on during the last recession are now benefitting from the spike in pricing over the last 12 to 18 months,” Kirsh said. “In some cases, they are able to sell their assets at or above their original loan balances.”


Real estate broker Marc Renard of Cushman & Wakefield represented both the buyer and seller in the transaction.

Press, Real Estate
107-Unit Apartment Portfolio in LA’s Koreatown Sells for $8.8 Mil

Private investors purchased a three-building, 107 unit multifamily portfolio located in the Koreatown submarket of Los Angeles for $8.8 mil ($82k/unit). The properties, sold by Vista Investment Group LLC, traded in a single transaction that involved the buyer assuming the existing first trust deeds of the properties and adding supplemental debt to the loan balance.


The three properties range in size from 27 to 40 units and are all located within one block of each other at 407, 530 and 531 South Kenmore Ave. The properties are brick colonial revival buildings built in the 1920s and offer a desirable unit mix across the portfolio (four bachelor, 82 studio and 21 one?bedroom apartment units).


The seller, who acquired the portfolio in late 2009, felt that the rebounding multi?family investment market presented an opportune time to divest of the assets. The new owner plans to invest significant capital into the unit interiors, the building’s mechanical systems, and the common areas to capture higher rents in the vastly improved Koreatown submarket.


Darin Beebower, a partner at Madison Partners, represented both the buyer, investment entities controlled by Philip Miller and Jeremy Miller, and the seller in the transaction. Beebower previously arranged another transaction between the same parties in 2012.


“This transaction required a tremendous amount of coordination between the parties and counsel as it involved an assumption of a Fannie Mae loan,” said attorney Andrew Kirsh, co-founding partner of Sklar Kirsh LLP, who advised the seller on the transaction. “This is a win-win deal for both parties as the buyer is getting three great properties in a tight market and Vista is seeing the benefit of four years of repositioning the assets.”

  • “For several years, I have worked with Sklar Kirsh for my M&A and other corporate law needs.  They are practical and creative lawyers and have guided me through several major transactions with a steady hand and clear focus on my goals.”
    — Mark Mickelson, Managing Partner of Next Point Capital, Chairman of Art Brand Studios & Chairman of Next Point Bearing Group

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