08/13/2010

Cornerstone Raising Capital for Bridge Loans

Cornerstone Real Estate is seeking to raise $500 million of equity for a fund that would originate commercial mortgages on transitional properties.

Cornerstone, the real estate arm of Massachusetts Mutual, would provide borrowers with relatively high leverage - up to 75% of a property's value. In return, it would collect a fee upon the sale or refinancing of the collateral.

"Essentially, they are providing flexible capital to the borrower via higher-LTV bridge financing," said an investor familiar with the plan. "They get a piece of the action upon sale or refinance."

The vehicle, Cornerstone Enhanced Mortgage Fund 1, has a return goal of 11-14%. The loans would likely carry terms of 1-3 years, according to the investor. With leverage, the fund could write $1 billion of mortgages.

Since the credit crunch began to ease, most lenders have focused on long-term loans on stable properties, bypassing riskier mortgages on properties that need to be renovated or leased up. Hartford-based Cornerstone is angling to fill that void.

The company, which declined to comment, is shooting for a first close by yearend. That timetable is seen as somewhat aggressive, given the ongoing reluctance of institutional investors to commit fresh capital to real estate and other investment vehicles. It would be the third debt fund formed by Cornerstone. In June, the company announced that it had closed on $1.75 billion of equity for a fund and a separate account that invest in plain-vanilla commercial mortgages.

At the time, market players said $1 billion of the capital was raised from outside investors, with Mass Mutual itself kicking in the remaining $750 million. The Wall Street Journal last week reported that China's sovereign wealth fund, China Investment Corp., has committed $1 billion to Cornerstone. It's unclear if that was part of the $1.75 billion of capital cited by Cornerstone.

The fund that had its final close in June, Cornerstone Core Mortgage Fund 1, originates low-leverage loans underwritten to life-company standards. Terms are 3-7 years, with loan-to-value ratios generally less than 65%.

The new vehicle will charge a 0.75% management fee. After investors receive an 8% preferred return, Cornerstone is entitled to 20% of the profits. It's unknown if Cornerstone is using a placement agent. It retained Park Hill Real Estate of New York to raise capital for its core mortgage fund.

Cornerstone chief investment officer Robert Little oversees real estate plays.

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