States Capital helps investors move “dry powder” off the sidelines
Debt fund provides investors safety by investing lower in the capital stack—backed by mortgage notes against real estate
In a choppy real estate market, States Capital LLC is offering investors a way to move their idle capital off of the sidelines and back to work, earning an attractive return. The private debt fund allows accredited investors to invest in real estate without the typical risks – and management headaches – of owning real estate.
Structured as a Reg D 506c, States Capital is the capital-raising arm of We Lend, a private real estate lender that makes business loans secured by first-position liens. “As a first lien lender, you are paid before any other investor in the capital stack,” says Ruben Izgelov, Co-Founder and Managing Partner of States Capital. “Debt investments are especially attractive to investors because debt is prioritized in the capital stack, and it has the added security of a hard asset backing the debt as collateral, thereby bringing certainty during uncertain periods.”
Current market turbulence is casting a brighter spotlight on debt strategies, and investing in debt has been growing in popularity in recent years as investors across the board recognize the benefits debt investments can offer. “Debt carries a substantially different risk profile compared to equity investments, and investors covet the opportunity to offset exposure in their portfolios with safe, high-yielding products,” says Brian Sachs, Director of Underwriting at We Lend.
Industry experts support the case for investing in debt. “Debt is the portion of the capital stack you want to be invested in now due to the reduced risk and higher returns you are able to achieve relative to equity,” says Justin Ehrlich, founding partner of Churchill Real Estate. Kevin S. Kim, Esq., Corporate & Securities Partner at Geraci LLP, agrees: “Private lending has always been an attractive niche investment for fixed-income investors. For the past 10 years, the space has grown to be the darling of Wall Street. Privately managed debt funds, like States Capital, grant a lot of interesting benefits by giving you direct access to these assets with a strong, relationship-focused sponsor.”
In Kim’s view, States Capital’s team is one of the best options for this type of strategy because they have a direct line of sight to the assets and the borrowers, and can directly influence the outcome of the portfolio, unlike large institutional funds with multiple layers of bureaucracy and very little direct borrower relationship.
Investing capital into debt funds also provides an additional layer of diversification by spreading the investment across multiple loans, properties, and borrowers. “Diversifying the investment across a pool of properties enhances the safety and security for the investor when investing in States Capital,” notes Moses Suleymanov, Director of Credit Analysis at States Capital. The debt fund also provides capital to different types of properties from New York and New Jersey down the East Coast to Florida, which further enhances diversification. The majority of its lending is focused on residential asset classes, assets range from multi-unit apartment buildings to single-unit homes.
Another benefit of investing in a debt fund is passive, consistent income. States Capital is funding fixed-rate, 12-month interest-only loans. “In a market like today’s, where rates are going up, it’s prudent to make short-term loans,” says Ruben. The short-term nature of the loans allows the company to easily reset the basis with loans that are maturing and being repaid. “As the rates go up, so do ours. Our spread is fixed and delivers a steady, predictable income to investors,” he says. John Beacham, CEO of Toorak Capital Partners, also notes that “Short-term bridge loans provide higher yields and limit exposure to longer-term housing market cycles.”
Inception of the lending platform
States Capital raises capital to fund loans originated by We Lend. Target borrowers are predominantly experienced HNW real estate operators buying physically or financially distressed residential properties. The debt fund is open to accredited investors with minimum investments of $100,000. The year-one target is to raise $20-30 million with a total offering amount of $50 million.
We Lend is a family business, and the executive team has an insider’s view of the residential real estate market. “What differentiates us from other lenders is that we are former fix-and-flippers. Collectively, we have underwritten more than $1.3 Billion in real estate since 2013,” says Moses. “That experience gives us an appreciation of borrowers’ needs as well as insight into how to be a creative and responsible lender.”
In fact, it was their search for a lower cost of capital to fund their own acquisitions that landed them at a private lender conference in 2018. “We walked in as private investors and we walked out as private lenders,” says Ruben. They launched We Lend, seeding the company with private capital as well as strategic partnerships. Since making its first loan in May 2018, We Lend has originated nearly 1,000 loans, with 63% of their business coming from returning borrowers.
“Ruben, Moses and the entire States Capital/We Lend team are seasoned lending professionals who are well prepared to weather and thrive in the current economic climate. Private Lender Law appreciates the partnership with them as we execute closings throughout the country,” says Jonathan L. Hornik, Esq., chairman of the Private Lending Law Group at LaRocca Hornik Rosen & Greenberg LLP.
Mitigating risk with solid underwriting
Much of the distress that emerged in the Great Financial Crisis was due to poor underwriting, and We Lend is committed to making sure that doesn’t happen on its platform. “We have a box, and our goal is to make sure that our borrower has a clean background and upstanding credit,” says Moses. “We are essentially doing a deep dive underwriting of borrower’s credit, background, experience, and most importantly, the asset.” They have a vested interest in solid underwriting as they have invested their own capital alongside their investors’ capital. “We want to make sure every investment we make is a secure and sound investment,” says Ruben.
Nearly 90% of the borrowers that the firm works with are experienced, full-time operators. Often, that experience allows them to find better investment opportunities at steeper discounts, making their basis in the loan even safer. In addition, they are better equipped to navigate in a down market, Ruben notes. “We want to see that the project that a borrower is entering into is similar to what they have done in the past and it’s not something new for them.”
We Lend works with a panel of vetted appraisers to ensure that they are lending on properties that are true to their value. By reviewing the appraisal in conjunction with internal diligence, the underwriting team is able to get a high-level understanding of every deal, and identify a clear exit strategy: typically either to fix and flip the property, or to stabilize and hold a cash-flowing property. “We want to make sure the borrower has a viable exit strategy that will result in the full repayment of our short-term loan,” says Moses.
Currently, We Lend’s average loan size is around $400,000. Focusing on loan amounts near the median cost of housing avoids some of the risks prevalent in the luxury sector when the market shifts. Ruben explains, “The average leverage against a borrower’s purchase price is about 82%, which means that borrowers have significant skin in the game considering their down payment, closing costs, and the start of the properties construction.” Once improvements are complete, the borrower’s average equity in the deal increases by 43%, bringing We Lend’s leverage against the properties as-is value to an average of 57%, “which really speaks to the safety and security of the loans we make.”
“In essence, we’re always stress-testing the investment we make on every loan,” adds Solomon.
The company analyzes a property’s current and future cash flow to ensure that the loan payments can be paid through the property’s income. In the event of a market softening and a borrower is unable to sell the property, We Lend knows that the borrower will be able to continue paying the loan, and also use the rental income to qualify for financing to take out the loan.
The average borrower on the We Lend platform has a FICO score of 693, an average loan size of $380,000, and an average net worth of $2.6 million. “Lending to institutional-grade borrowers is crucial because we know we will have greater certainty in a borrower’s ability to refinance and take out our loan, or the ability to sell the loan to another institution once we make the loan – for which there is an enormous appetite in the secondary market due to the strength and the historical performance of these loans,” says Solomon.
The Principals at States Capital have a vested interest in making secure, safe loans because they have invested their own capital alongside their investors. “We want to make sure every investment we make is a secure and sound investment,” says Ruben.
We think we’ve got a leadership team, and a funding process in-place that provides an optimal combination of fiscal austerity and growth potential, and we’re thrilled to be able to share this opportunity.