Denholtz Properties, a commercial real estate manager based in Red Bank, New Jersey, has rolled out a rescue capital fund to provide preferred equity and mezzanine debt to sponsors facing short-term capital challenges.
Steve Cassidy, president, told Real Estate Capital USA the firm will use the Denholtz Opportunity Fund II to tackle an uptick in situations in which sponsors are facing operating deficits, refinancing obstacles, cost overruns and lower-than-expected rental rates.
“The reality today is we have settled into a less volatile market for debt. The meteoric rise of interest rates has been so challenging, but I think today, there is a sightline where you can start to create and execute a plan,” Cassidy said.
This change is a significant one for a market which has largely been inert for the past year, Cassidy added.
“We have all been sitting around, looking at the volatility, and thinking about how many ideas we have but can’t execute on until there is stabilization. Now is the time where we could see a time where rates go down and we can look for a backdrop for these plans to be vetted out,” he said.
The firm will provide financings of $5 million-$25 million which are subordinate only to first mortgage debt in markets which include New York, New Jersey, Pennsylvania, Florida and markets in the Southeastern US.
“Our product types are going to be industrial and multifamily. While we have and like office properties, the sector is more challenging because it is hard to see an endgame,” Cassidy said. “We are hoping to use the acuity of our asset management to help real estate groups to find answers to their problems.”
The firm continues to see a significant bid-ask spread between buyers and sellers. “If you can’t buy outright, finding these transactions to position yourself in the cap stack to align your risks with current market values is very attractive to us,” Cassidy added.
Denholtz Properties is seeing a greater willingness on behalf of market participants to transact today than a few weeks ago.
“This sense that there is stabilization is key,” Cassidy said. “I don’t think anyone is sitting around and realistically thinking that we’re going to go back to a 3 percent interest rate environment. That was a product of the pandemic and likely will never be seen again.”
But greater stability in Treasury yields is providing a footing, as well as the potential for managers to deploy capital which has been on the sidelines.
“You’re no longer as worried about, for example, a 150-basis point movement because that level of choppiness makes it hard to finish a deal,” Cassidy said. “There is also a tremendous amount of capital out there looking for a home. Treasuries at 5 percent are great, but it doesn’t make long-term investing a good place to be.”
Part of the firm’s strategy will be positioning itself as a strong asset management.
“If you position yourself as an asset manager, rather than just a boots-on-the-ground operator, that expertise is a benefit,” Cassidy said. “It allows us to invest in what makes sense to us, whether it is debt or equity. But where we really have an edge is in rescue capital. We look at it from an investor standpoint and from the standpoint of a fully integrated real estate company. We can be a developer, we can execute business plans and we can run a property from a sophisticated capital markets or operating company perspective.”
The firm has grown to more than $2 billion in assets under management, with people on the ground in all its target markets.
“This familiarity allows us to leverage the company and the relationships we have built to help folks who are undercapitalized or more start-up oriented,” Cassidy said. “We are not only providing capital, but we are also providing counsel if they need it or want it. We understand you’re only as good as your last deal and, as a company with a more than 70-year history, we are sensitive to the importance of reputation.”