Real estate finance in 2020: What originators want to know

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Yieldstreet is dedicated to finding attractive real estate investment opportunities for our investor base that provide an attractive risk-adjusted return, all while hyper-focused on principal protection in a downside scenario. Over the past two years, we’ve continued to refine our origination process in an effort to make it as efficient and transparent as possible for our clients, other CRE lenders. Through these efforts, we’ve identified some key takeaways that are often asked of us. We hope that this information is of value as you consider how best to work with Yieldstreet.

Yieldstreet offers first mortgage, mezzanine and preferred equity capital with terms up to 5 years.

We invest across the capital structure. As there are different capital requirements for different transactions, we have the ability to invest in any part of the capital stack that we believe is attractive and provides the right level of return for the risk. While the vast majority of loans made to date have been in the form of traditional first mortgage liens, we’ve also made both mezzanine and preferred equity investments.   

Diversified Property Types: We lend against all property types including industrial, office, multifamily, retail, entitled land, and hospitality—primarily in the top 35 Metropolitan Statistical Areas (MSAs).

A lot of lenders are constrained by asset type or geographies. That is not the case at Yieldstreet. We’ve worked across almost every real estate asset type ranging from industrial to retail.  We primarily focus on the top 35 MSAs (secondary and tertiary markets on a case-by-case basis) where we believe there is enough liquidity in the respective market to provide an efficient exit option should problems arise. The lack of options to monetize real estate in a tertiary market is amplified in an economic downturn when there is likely a capital flight to safer markets like gateway cities and generally more stable property types like multifamily and office.     

Yieldstreet is able to paper our investment as a participation, but our preference is a note with a co-lender.

There are two ways we partner with our origination partners: a participation agreement, which means an economic interest in the loan, or a co-lender structure where we hold our own promissory note (one loan agreement). The advantage of having a co-lender structure is the ability for us to execute the deals that have lower yields, and then use leverage from different providers to offer a target return of 8-9% to our investors. We prefer the co-lender model because it allows us to do what we consider to be higher quality deals. We are also open to acquiring 100% of the loan from a partner but that is not our preference.

Requirements: Standard legal packages including appraisal, phase I, PCR, survey, etc.

Some lenders are able to close in extremely short timeframes, in some cases in under three days. Our underwriting process is detailed and time-consuming, but we work hard to provide accurate expectations for our partners and borrowers. For the average transaction, we generally assume a 3-4 week timeframe from signed term sheet to funding. We work to ensure that all of our bases are covered to protect our investors. 

  • While we do our own internal value analysis, the appraisal is used to confirm the value of the asset.  
  • A property condition report is used to ensure the building is in good condition. 
  • A phase 1 environmental report is used to check that there is no environmental hazard to the property that could affect its value or resale.  
  • A custom survey is required to avoid any exceptions on the title policy.  

We can lend up to 80% Loan-to-Value (LTV)/Loan-to-Cost (LTC), but do not seek out ground-up construction.

With regards to a standard first mortgage loan, our LTV typically ranges from 65-75%. If we are in a mezzanine or preferred equity position, we are able to go up to 80% of the value of the asset(s). We are currently aiming to be more conservative given the overall market volatility. At all times, our number one priority is repayment of our investors’ capital.  

In terms of ground-up construction, we tend to shy away from these types of loans due to our platform set-up and familiarity with construction. We are not well suited to step into a project that has run into issues and have to complete the work ourselves. Alternatively, we do seek out partners who possess this expertise. We are selective about our partners in the construction space and look for those who, in the event the borrower is unable to perform and complete construction, have a team in place to take over the project and see it through to completion.

We can take all or smaller amounts of the loan in the event the Originator would like to maintain exposure to the loan.

The partners that we work with all have different requirements for how much of the loan they want to keep on their own book and how much they want to syndicate. We have created a program with different lenders where we take different percentages of the loan based on each and every deal. This proves to be advantageous for our partners as they retain or syndicate amounts based on their capacity at the time. We are very flexible in this way.

Yieldstreet provides an ongoing strip of the coupon payment to Originators, essentially boosting their net yield. 

We’re able to take 90% of the loan and provide an ongoing skim of the coupon (generally 25 to 75 basis points). For instance, if an Originator originates a loan at 10%, we buy the loan at 9.5% which typically results in significantly higher yield for our partners on their capital outlay. This is a way for them to have leverage on the loan while still being in a pari passu position.

We can take senior, subordinate, or a pari passu piece depending on the deal profile.

Every deal we review has a different risk profile. Each Originator has a different appetite. Either they are solving for being in a safe position and taking a very low yield, or they’re solving for much higher returns. We’re flexible and do not mind taking the senior position putting us in a low yield spot. We can also take a subordinate position or remain pari passu as is the case in the vast majority of our transactions. Given that we work across a broad spectrum of partners, this sets us and our partners up with the most flexible lending spectrum.

We provide capital to smaller Originators so they can do larger loans.

Many Originators starting out have 2-5 years of experience, executing consistent deals and have good track records originating loans ranging from $1M to $4M+.  However, these Originators have the ability to do larger loan sizes but are capital constrained. This is where Yieldstreet plays a critical role in their growth. If an Originator only has $5M to put into a deal, we will provide the other $45M. We also pay them an ongoing servicing strip. This allows Originators to grow their businesses by doing larger loans without compromising on yield. 

For larger funds, we can provide an avenue to syndicate loans from funds in the event the fund reaches capacity or due to geographic/asset type constraints. 

A lot of larger funds that we work with have no capital constraints. The way we’ve worked with many Originators with these types of funds is by acting as the syndication partner if the fund reaches capacity. For example, if their fund limit for $2B has already been reached and a $100M deal comes along, we can provide that additional capital. Also, a lot of the funds have restrictions with regard to the geographies or asset types they can invest in. In this case, Yieldstreet can buy these loans to free up their capital for other deals.   

Provide marketing for Originators through our website and extensive base of investors. 

Yieldstreet offers value to Originators, especially up-and-coming Originators with 1-2 years of experience who want to get their name out there. We have over 300K members on our platform to whom deals are sent, highlighting the Originator and their track record. This ultimately makes the Originator a known name to our investor community, with whom they become more comfortable investing over time. We have seen this first-hand with our partner Avatar Financial Group. Avatar’s first deal took almost a full day to fill while their most recent deal was fully allocated in under one hour. Our members recognize the Avatar name now and are comfortable with it. 

If you would like to know more or are in need of liquidity, please contact our riginations team via email ([email protected]) or submit an application here, Raise Capital.

This communication and the information contained in this article are provided for general informational purposes only and should neither be construed nor intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice. Any link to a third-party website (or article contained therein) is not an endorsement, authorization or representation of our affiliation with that third party (or article). We do not exercise control over third-party websites, and we are not responsible or liable for the accuracy, legality, appropriateness or any other aspect of such website (or article contained therein).

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