High-Rise Condo Market Opens New Lender Frontier
James Perry and Thomas Testa are presidents of Orange County, Calif.-based The Alliance Portfolio, a private money mortgage banking corporation that provides a variety of lending programs for commercial and residential real estate as well as opportunities for investors through its mortgage-backed securities.
As the high-rise condo phenomenon continues to spread in cities like Las Vegas and Los Angeles, opportunities for investors are rapidly expanding as well. The increasing popularity of high-rise is paying high dividends for those savvy investors who understand the dynamics of this evolving marketplace. The trend towards high-rise living is having significant impacts on the real estate investment industry. In many instances, higher-density housing translates into higher quality, higher values and higher returns.
These projects are spearheaded by savvy developers such as Donald Trump, Forest City, Fifield, Turnberry, Bosa Development and Lennar, to name a few. According to marketing experts, the top condo markets, including high-rise, are Atlanta, Boston, Dallas, Denver, Los Angeles, Oakland, Orlando, Phoenix, Portland, San Diego and San Jose.
Many cities have even put out the welcome mat to any reputable developer willing to build high-rises (in fact, Santa Ana, Calif., has insisted that the developer of a mixed-use project it just approved include a high-rise). Homebuyers from foreign countries are also big on high-rise condos, pointing out that these buyers are culturally more in tune with high-rise living and they are taking advantage of the weakness of the U.S. dollar.
Why all of a sudden are high-rise condominiums in such great demand? Some experts believe that limited land availability is the reason for areas like Southern California, while others believe that demographics are the impetus. The buyer profile attracted to these projects is diverse: from empty nesters to singles. These buyers are affluent individuals who prefer to swap a yard for 24-hour concierge services, security and simplicity. They represent a highly qualified pool of borrowers with equity and borrowing power, driving the need for this purchase money financing opportunity.
In many areas (especially where there are huge demands for new housing), higher-density housing translates into higher quality, higher values and higher dividends. Due to the market and economic forces in areas where there is huge demand for housing, high-rise development could offer a rich vein of investment opportunity for the smart, informed investor.
This market is moving quickly and investors are lining up. But it's not an easy market to clearly understand or get one's arms around, especially with some of the more popular but challenging projects such as mixed-use properties. Also, for the secondary market, there are specific guidelines that many properties won't meet because they don't satisfy underwriting guidelines, which are set in stone. Some of the "hybrid" communities that may encompass a variety of uses are too weird for mainstream lenders to deal with, especially since most commercial lenders place great value on the path of least resistance, but may offer very attractive investment opportunities.
Private mortgage pools embrace high-rise projects. In the past couple of years, returns of 10% or more in mortgage pools - compared to 3%-4% for more mainstream investments - have been common.
While there are different avenues to take in real estate investment - such as funding a mortgage directly, by participating in a multilender or syndicated specific mortgage, or by investing in a mortgage pool - we believe the latter is the most convenient and effortless method. Investors pool their money by buying shares in the pool fund. Interest earned from the payments from the fund's mortgages become income for the fund. Similar to a mutual fund, a mortgage pool provides a vehicle to diversify a portfolio of investments ... in this case, mortgages instead of stocks or bonds. Investing $50,000 in a mortgage pool consisting of 25 loans valued at $15 million provides better security through diversification than a $50,000 investment in a single loan secured by a single property.
Mortgage pools are registered securities that are required by state and federal agencies to provide complete and full disclosure through an offering memorandum. A mortgage pool is usually managed by a limited liability company that sells shares to investors. Comparable to a mutual fund manager, the mortgage company is paid a fee to research the proposal, make the lending decisions and handle all of the payments and administration. The capital from investors is used to purchase a number of different loans, which are secured by real estate, commonly called mortgages or mortgage-backed securities.
Whether it's demographics, the lure of the city, or the attraction of luxury living, high-rise condos seem to be taking the residential market by storm. Thanks to new ways of financing these projects, like mortgage pools, you can expect this trend to continue.
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