Narula's Metacapital Nears Start of Real Estate Lending Fund

  • Hedge fund will make bridge loans directly to borrowers
  • Sees $400 billion opportunity as CMBS loans need refinancing

Deepak Narula’s Metacapital Management is preparing to launch a commercial real estate lending fund with more than $85 million in initial capital, according to a person with knowledge of the matter.

The fund, which has been in planning since February, is expected to begin operations before the end of the year, said the person, who asked not to be identified because the information is private. It will make short-term bridge loans of between $5 million and $25 million on “transitional” commercial real estate, according to a third-quarter investor letter from October seen by Bloomberg. 

Narula said “the opportunity in securities is really over,” in a February interview with Bloomberg TV. The company is turning to lending as traditional sources of finance including investment and commercial banks reduce their risk-taking and participation in capital-intensive businesses.

Refinancing Challenge

The fund is trying to address a challenge to investors in commercial mortgage-backed securities: how billions of dollars in loans made in the run-up to the financial crisis are going to be refinanced on properties that may now be less profitable. About $350 billion will come due every year through 2017, according to Morgan Stanley.

Some of those loans were made on properties that would benefit from renovations and other improvements to increase their value. Metacapital is betting it can provide financing for that work. It sees the market opportunity in the range of $400 billion, according to the letter. The fund is targeting $250 million in total capital, the letter says.

The firm is targeting an annual internal rate of return of 12 percent to 14 percent with dividends in the same range, according to the letter. It expects its loans to yield 5 percentage points to 6 percentage points more than the London interbank offered rate, with loan-to-value ratios of 65 percent to 75 percent. Libor, a lending benchmark, was set at 0.39 percentage point on Thursday.

Metacapital’s biggest fund, Mortgage Opportunities Strategy, will invest around $30 million in the new offering, it said.

A10 Capital LLC, Arbor Realty Trust Inc., Colony Capital Inc., NorthStar Realty Finance Corp., RAIT Financial Trust and Resource America Inc. have created similar businesses. Such firms use securitizations such as collateralized debt obligations to raise funds.

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