$100 million of committed capital.

GlobeSt.com: What led you to conclude that these routes are the optimal strategy for North River at this point in the market?

Kaye: We started closed on the fund in April and opened our doors in May. Since then we have taken quick survey of what is on offer from financial institutions for purchase and concluded that, for a fund like us, a lot of notes and mortgages are still expensive relative to the underlying economic value of the debt on the property.

GlobeSt.com: A lot of banks are offering discounts – even when they say they won't initially, they agree to one after the bidding doesn't result in a hard sale.

Kaye: From what we have seen, the discounts that are being offered do not make sense to us on a total return basis – at least not yet. If you do an analysis on the underlying loan relative to the value on property and then overlay that on how people will lend on that asset today, on a long-term sustainable basis the offering price just don't make a lot of sense.

GlobeSt.com: So instead you are investing in A notes and whole loans. Can you explain the investment case?

Kaye: Generally speaking, we are seeing these deals price in high 80s to low 90s in dollar prices. Some sellers are offering leverage and seller financing, and, of course, some are not. But when you do the math on some of the offerings we can come out on leveraged basis in the mid-teen area.

As for the new loan mezzanine origination market, the opportunities are much stronger there compared to a year ago. Last year lenders were lending at 80% LTV based on aggressive cap rates and aggressive cash flow assumptions. Today lenders -- the few that are active -- are lending at very conservative levels. We see an opportunity to provide gap funding by taking the senior loan up to 80% to 85%.

GlobeSt.com: There is some competition in the market now for that strategy.

Kaye: True, but more players have left than are entering now. Also there is the opportunity to make great returns.

GlobeSt.com: How great?

Kaye: Current coupons on mezz paper can be in the low to high teens, depending on the transaction's story, its leverage levels and so on.

GlobeSt.com: Which strategy will you favor this year?

Kaye: We set up the fund to be flexible – we did not want to be restricted to one investment style. Right now, originating loans is where our focus will be. In Q4, when banks start pushing paper out of the door and discounting it, then we will shift focus.

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Erika Morphy

Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.

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