10/02/2009

AREA, CIBC Teaming Up on Mortgage Fund


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CORRECTION:

An Oct. 2 article, "AREA, CIBC Teaming Up on Mortgage Fund," misstated Richard Mack's title at AREA Property Partners. He is North America chief executive, not the firm's chairman.

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AREA Property Partners and CIBC are seeking to raise $250 million of equity for a fund that would originate senior commercial mortgages of up to $75 million.

The vehicle, dubbed ACRE/First Mortgage Fund, will also be backed by a $500 million warehouse credit line from CIBC. That would increase its investment power to $750 million if the full equity goal is achieved. New York-based AREA, formerly known as Apollo Real Estate Advisors, and CIBC will co-manage the vehicle.

At least two other players recently began eyeing the origination of relatively large mortgages. Goldman Sachs has committed an undisclosed amount of equity to two platforms that target loans of at least $25 million. And Deutsche Bank has a program to originate loans of up to $200 million. The activity provides hints that the largely frozen origination market may be starting to thaw.

The fund operated by AREA and CIBC will write five-year, fixed-rate loans with coupons of 8-10% and amortization schedules of 25 or 30 years. The loan-to-value ratio will range up to 75% for individual properties and 65% for portfolios. Cashflows from collateral properties must be more than 1.3 times the amount needed to cover debt service, and higher for hotel loans. Borrowers generally will pay a 1% origination fee, although the fee could be as high as 2%.

The fund initially will retain the loans, but will look to securitize them if the commercial MBS market revives. AREA and CIBC are telling investors that they could ultimately securitize 70% of the loans. They could also syndicate the senior portions of loans and retain subordinate positions.

CIBC's credit facility has a three-year term, with a three-year extension option, giving the fund the ability to hold five-year loans to maturity. However, the operators acknowledge that if loans are held to term, returns will likely be in the 7-9% range, versus 13-15% if securitization or syndication is used.

The fund will have a right of first refusal on fixed-rate mortgage opportunities presented to both AREA and CIBC. As a result, according to the pitch being made to investors, the fund should have a steady pipeline of top-quality loans.

AREA and CIBC will kick in $7.5 million of the total equity. The fund will charge a 0.5% management fee. After investors receive a 7% preferred return, the sponsors are entitled to 20% of the profits.

AREA is led by real estate veteran Richard Mack, who is the firm's chairman. Bradford Wildauer oversees the U.S. debt business. CIBC's real estate finance group is headed by managing director Michael Higgins.

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