BBB Rating|A+

Resource Center

Everything you need to know about commercial real estate investing, real estate crowdfunding and more.
3 Senior Debt Products, 2 Ways to Invest, 1 Platform
January 13 | 2016

Three Senior Debt Products

At RealtyMogul.com, one of our goals is to let real estate professionals (sponsors, borrowers) focus on what they do best – find attractive real estate investment opportunities. We do that by taking care of their capital needs. One of these needs is senior debt.

RealtyMogul.com lends on most commercial properties that are income-producing, like apartment buildings (with more than four units; anything up to four units is considered a residential property), hotels, retail centers, office buildings, industrial facilities, self-storage facilities, mobile home parks (also known as manufactured home communities), and more. We do not lend on ground up development projects or land.

We offer three types of loans:

Private Money Loans (“Hard Money” Loans):

Private money loans are short-term (typically for one or two years), higher yield (fixed interest rate of 8% or higher) loans. They are interest only loans, which means that no principal is paid by the borrower during the term of the loan (full principal is repaid when the loan matures).

Private money loans are used as a short-term financing solution for borrowers that want to acquire a property in an opportunistic transaction and increase the value of the property through renovation, occupancy increase, or other meaningful repositioning. The borrower may not be able to get a more traditional long-term, low-rate loan from the bank (that’s where the “hard” in hard money comes from – it’s hard to get a loan) due to time limitations or the condition of the property. Instead, the borrower obtains short-term financing, hoping to refinance the property with a lower rate loan at a later stage.

Example: you found a heavily discounted property that just came out of foreclosure. You only have 21 days to close on the property, which is 70% occupied. Due to the urgency and other factors related to the property’s condition and cash flows, you are unable to get a traditional loan from the bank. You get a private money loan, fix the property up, increase occupancy to 90%, and refinance to a lower rate (or sell) after two years.

RealtyMogul.com currently offers private money real estate loans for any amount between $0.5 million and $10 million.

Bridge Loans:

Bridge loans are medium-term (two to five years) interest only loans that carry a variable[1] interest rate of LIBOR+4%-7%[2]. These loans are typically used as a medium-term financing solution for borrowers that acquire value-add properties and want to stabilize the property’s performance in the medium-term before selling the property or refinancing.

Example: Similar scenario as above but with additional time (30 to 60 days) to underwrite and close the transaction. The loan will be structured to allow a borrower to reposition the property utilizing existing cash flows, loan proceeds and inflow of new equity.

We currently offer bridge real estate loans for any amount between $2 million and $50 million.

Permanent Loans (“Perm” Loan):

Permanent loans are longer-term (five to ten years), usually lower yield (fixed interest rate of matching terms treasury rate[3] + a spread of 2%-3%[4]) loans. Although perm loans may have a short interest only period, unlike private and bridge loans, they typically require that borrowers start repaying a portion of the principal during the term of the loan. These loans are used as a long-term permanent financing solution for borrowers that acquire or refinance stable properties.

Example: the borrower from the above scenarios has completely renovated and stabilized the property, which is now 90% occupied and has stable and predictable cash flows. The borrower refinances to a lower rate, longer term loan.

Similar to bridge loans, we can finance $2 million to $50 million in perm debt.

Two Ways to Invest

We offer access to commercial real estate loans through two investment options: platform notes, and whole loans.

Platform Notes

Platform notes allow investors to invest in a piece of a loan rather than purchase the entire loan. In a sense, this is true real estate investing crowdfunding.

Out of the three commercial debt products discussed above, the only one available to individual retail investors through platform notes is the the private money debt product, as the size of bridge and perm loans (much larger) and their return profile are more consistent with institutional investment objectives as compared to retail investors (and institutional investors generally purchase loans in whole).

Investors who use the real estate investing platform purchase a platform note, which is an unsecured note in Realty Mogul, Co. (the company that owns and operates RealtyMougl.com). The performance of the platform note is tied to the underlying real estate loan.  This Platform Note allows its holders to receive periodic payments on the loan if and when the borrower on the underlying real estate loan makes interest payments.  Platform notes are not directly secured by real estate, but investors are entitled to any net amounts recovered by RealtyMogul.com in case of a default followed by a foreclosure and liquidation. Since platform notes are not secured by real estate, the holder has no obligation to contribute additional capital in the case of default.

Real Estate investors investing in a private money loan through a platform note can expect a return of 8-12% if the loan performs to maturity.

Learn more about platform notes on our FAQ page.

Whole Loans

Institutional investors, family offices, and high net worth individuals who wish to invest larger amounts, can choose to purchase a loan in whole through RealtyMogul.com. Unlike platform notes, whole loans are directly secured by real estate. This means that investors can initiate a foreclosure process in case of an uncured default, but are also responsible for the cost of such foreclosure.

Learn more about our whole loans program on our FAQ page or by contacting our investor relations team.

You may find the below table as a useful summary of our commercial debt products. You can also visit this page to get the most up-to-date information about these products.
 

Type

Private (“Hard”) Money

Bridge

Perm

Who?

Borrower with limited time to close on opportunistic transaction

Borrower with ample time to close on a value-add transaction

Borrower with ample time to close on a stable property

Why?

Transitional short-term solution to allow repositioning

Transitional medium-term solution to allow repositioning

Long term hold

How Long?

1-2 years

2-5 years

5-10 years

What Price?

Fixed; 8%+

Variable; LIBOR + 4-7%

Fixed; treasury + 2-3%

How Much?

$0.5-10 million

$2-50 million

$2-50 million

How to Invest?

Platform notes or whole loans

Whole loans

Whole loans

One Platform

Both platform notes and whole loans give investors the power to select the investments that make sense to them on RealtyMougl.com. As with all opportunities offered on RealtyMogul.com, investors should evaluate each individual real estate investment opportunity to see which best fits his or her investment strategy.

Invest in real estate today.

It’s also worth mentioning that loan rates and terms are subject to change, and that investor returns depend on such loan rates.

Get debt financing for your next project.

By Arik Moav, Director of Finance at RealtyMogul.com

 


[1] A variable rate (or “floating” rate) is typically tied to movements in external benchmark indicators like the prime interest rate, or the LIBOR.

[2] LIBOR stands for London Interbank Offered Rate. It is commonly used as a benchmark indicator to calculate interest rates on various loan products worldwide. The rates on our commercial bridge loans are tied to the one-month LIBOR. At the time of writing this, the one-month LIBOR is at 0.42%, making the rate on a LIBOR+5% loan 5.42%

[3] The benchmark indicator used here is the treasury rate. Matching terms means that the indicator used has the same term as the loan. Meaning, if you are borrowing for 10 years, the indicator will be the 10-year treasury rate. The 10-year treasury rate as of the time of writing this is 2.25%

[4] The spread is determined by many factors like the asset, its location, and other market conditions. Using a 2.5% spread over today’s 10-year treasury will result in a fixed rate of 4.75% on a ten-year perm loan.   

Arik Moav
Written by , VP of Finance at RealtyMogul.com

Arik Moav is the VP of Finance at RealtyMogul.com. Before joining RealtyMogul.com, Arik was a part of Amgen’s inaugural Finance and Strategy Leadership Development Program, serving in FP&A and Business Development roles. Prior to that, Arik was the VP of Finance and Business Development at TJH Investments, LLC, a private investment company with a focus on real estate and opportunistic start-up investing.  Arik earned a double BA in Accounting and Economics from Tel-Aviv University and a MBA from UCLA Anderson School of Management.

Did you find this article useful?
Please share your new knowledge.