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Angels increasingly active in B.C. property market

Peter Mitham, Business in Vancouver, June 21-27, 2005

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."