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Some consider them the lenders of last resort,
other the drivers of the current real estate
boom. But regardless of who you speak to, the
angel investors are active in B.C.'s property
market are a low-key lot who would rather keep
quiet about their dealings.
Angel real estate investors, like the angel
financiers to whom the startups of the
information economy turned to in the late 1990s
are typically experienced hands in the market
with cash to invest in the next new project with
promise. Anecdotal evidence suggests that
they're more active than ever as real estate
maintains its hold on investor's attention.
Calls from so-called angel investors have
jumped from one to two a week today from one to
two a month five years ago, said Rudy Nielsen,
president of Niho Land and Cattle Co. Ltd.
in New Westminster. Getting to know who's
available requires diligent networking with
those in the know.
"I know what they like," Nielsen says.
When a deal comes along that he thinks might
interest one of the people on his list, he
notifies them.
Equity stake
Angels prefer development deals with risk but
significant potential for return, Nielsen said.
The riskier a deal, the larger an equity stake
they'll demand, but the goal is to get a better
return than they might get through conventional
investments.
"They have capital that they don't want
to get three per cent on," he said.
Even in the current era of cheap debt,
private financings come at a price of 12 per
cent annual interest (Post bank rate at press
time: 4.8 per cent for five years.) While that's
below the 18 per cent yielded in the past, it
hasn't made angels any less willing to get
involved in deals.
Yet cheap debt is also making angels more
important to the success of some deals.
The double lure of real estates's stability
and continuing low interest rates has drawn
enough players into the market that cap rates
have dropped to a point that makes traditional
lenders cautious about the credit they're being
asked to extend.
"Since the cap rates are pushed down, [deals]
don't pencil as well for the lenders," said
David Andrews, a partner with Ward Jones
in Vancouver based Western Income Properties.
Down payments have become larger, reducing
loan to value ratios to 60 or 65 percent from 75
per cent a few years ago. That's created a
window for angels to fly in and bolster the
purchaser's hand with funds that give the
investor a leg up until they have the equity
needed to secure financing from traditional
lenders.
But those angels will also want security,
leaving the investor in charge of making a
project work.
"The younger broker or developer gets all the
risk and the chance of a much bigger upside,"
Andrews said.
Deep Pockets
Andrews has played both sides. Through
Western Income Properties, set up three years
ago, he has secured support from Berkshire
Securities Inc. to buy 10 apartment
buildings in Greater Vancouver.
"I own a building in Burnaby myself, but I
wanted to buy a lot more and didn't have the
capital," Andrews said, "This way I was able to
acquire the buildings...with no capital of my
own, just the time and overhead involved, and
run the buildings through a property management
company."
Andrews and Jones each take a 25 per cent
share of the profits from the operation, which
has typically yielded 8 per cent annually to
investors.
"It was perfect for the engineer, the doctor,
the accountant, that couldn't be a hands on
landlord. It gave them access to the market,"
Andrews' said.
Andrews is taking on a similar role himself,
staking capital on a development Jones is
working in Mammoth Lakes, California. The
project gives Vancouver investors a stake in the
Sierras while allowing Jones to develop a resort
in the area attracting demand for new
development.
The conditions attached to deals for both
sides are increasing, however.
The Enron mortgage fraud scandal
prompted a greater vigilance against fraudulent
activities and made it important for firms to
maintain their reputation with smaller
investors, and to reduce overall risk.
This is even more important as traditional
lenders become even more conservative and opened
up opportunities for angels.
Nationally, mortgage financings through all
channels have increased, with Montrose
Mortgage Corp. of Winnipeg reporting that
commercial mortgages rose from $16.4 billion to
$18.1 billion between 2003 and 2004.
But consolidation among mortgage providers
has meant newer companies like Vancouver-based
Trez Capital Corp. have been able to
grown, said Trez vice president Richard
Sirola.
Trez has just finished its best six months
and is aiming at total financings this year of
approximately $200 million, up from $160 million
last year and just $3 million in 1998.
Exit Strategies
But Trez is cautious, said Jim Bogusz,
the firm's chief financial officer.
"There has to be a pretty well defined exit
plan because we do stay on the short side of
these deals," Bogusz said.
Keeping close watch on its investments is a
point of pride for Trez.
"Our lending money comes from investors,
whether we syndicate a loan out to the
marketplace or investors buy into the various
funds we have. We have a very, very serious
obligation of delivering a return," Bogusz said.
"The one thing we're very proud of is our track
record to our investors. Nobody's lost a dime
here. Never, ever." |
