Lower leverage and higher spreads associated with transitional loans, combined with favorable occupancy trends
in transitional properties, point to a potentially attractive risk - reward opportunity in transitional lending for institutional investors.
In contrast, we believe that low leverage and a capital - committed equity holder can lessen the downside risk
on transitional property lending.
Amid this dual - track reality of the current investing environment, first - lien lending backed
by transitional properties potentially presents an attractive risk - reward opportunity.
The problems that
make transitional properties appealing as investment opportunities are usually the same ones that make them difficult to fund through conventional means.
35M 85 Y YY Y Y Y Y Direct Lender NATIONWIDE Acquisition or rehabilitation financing
for transitional properties with upside potential.
Although the surplus
of transitional properties available in the aftermath of the 2008 financial crisis has largely returned to normal levels, there are still many opportunities to make such investments, and hard money loans can help to ease the acquisition process.
As the transitional market continues to grow, we believe that a strategy focused on debt will enable investors to take advantage of this inherent mispricing of risk and discount to
transitional properties occurring in today's market.
Transitional property buyers typically require an expected unleveraged return of 10 - 15 percent on the investment in the property, based on Amherst Capital estimates, significantly higher than for stabilized properties.
The outperformance of low occupancy properties was also evident during the financial crisis in weaker performing markets, demonstrating that
transitional properties remain viable investments across markets.
Our analysis has shown the potential for outsized potential value gains for
transitional properties as a result of improving occupancies.
For too long, the commercial real estate market has overvalued in - place rents and undervalued the long - term earning potential
of transitional properties.
10M 75 2YYYYY Y YY Y YY YYYYY YYY Private Lender NATIONWIDE except: AZ CA NV Roc Capital offers small balance multifamily fix - n - flip loans for experienced owner - operators and bridge loans
on transitional properties.
The other reason that hard money loans are particularly useful for investing
in transitional properties is that private lenders have the freedom to use the after - improvements value of the property to set the loan - to - value (LTV) rate.
Transitional properties are a natural occurrence in the commercial real estate lifecycle, and the label includes properties that are experiencing a temporary interruption in cash flow or are generating income below market potential.
When valuing properties, we believe the market places too much emphasis on historical performance and in - place tenants, and this misplaced analysis leads to discrepancies in valuation metrics between stabilized and
transitional properties.
The higher required rate of return results in a steep discount to the value of
transitional properties and more than compensates the risk of transitional properties taking longer than expected to stabilize.
Second,
transitional properties have strongly outperformed stabilized properties in occupancy gains since 2011.
Mesa West Real Estate Income Fund II, L.P. Discretionary fund to originate and manage bridge financings for
transitional properties.