JB Capital readies multifamily, industrial-focused subordinate debt fund

Washington manager aims for majority mezz, preferred equity plays in SMILE markets.

JB Capital says it is rolling out a new real estate debt fund on or around May 4 to provide mezzanine debt, preferred equity and alternative sources of equity funding to owners, operators and developers of multifamily and industrial assets across the US.

The Bellevue, Washington-based alternative credit manager plans to target burgeoning secondary markets it finds to be ignored and underserved – including Denver, Dallas and Nashville, among other select locales – with its new open-ended Real Estate Lending Income Fund.

Jeremy Hill, founder of JB Capital, told Real Estate Capital USA the firm will be originating its first batch of loans this month and already has a waiting list of money and deals lined up for capitalizing on the debt fund’s strategy.

Hill said the fund is singularly focused on multifamily residential housing and industrial opportunities, with no target toward office, retail or biotech and lab properties. Deployments will largely look like $1 million to $20 million checks providing an equity alternative where debt funds, banks and other established lenders are unable or unwilling to fill gaps in a capital stack.

As deployments are made throughout the year, Hill said JB is targeting a 50 percent to 60 percent mezzanine and preferred equity composition with some senior positions also filling out the fund mix. The new launch fills out a fund lineup currently consisting of JB’s corporate credit fund and real estate credit fund.

JB’s fund does not have any management fees and uses no leverage, an atypical approach compared to the 2 and 20 fee structure associated with private equity firms. “For us, especially if we are going to have maybe half of our portfolio in mezz or preferred positions, adding a degree of complexity there by having leverage makes no sense,” Hill said.

The fee and leverage flexibility opens the door for JB to write a $5 million check where a $2 billion fund cannot afford to do so because of its leverage, according to Hill. He said the firm is angling for deals where, as an example, 65 percent of the capital stack is a senior loan, 20 percent is equity and the remaining percentage is proving painful to fill.

The debt fund is evergreen in nature, meaning JB has no plans to roll out a new iteration of the same strategy year after year, which in Hill’s view contrasts more typical plays from fundraising-focused debt players.

The firm is looking toward second-tier growth markets such as Denver, Dallas, Nashville, Phoenix, Atlanta and Asheville among other SMILE state fixtures for geographical opportunities. JB’s home base proximity to Seattle has also landed Washington’s most-populated city on the firm’s radar for deal potential.

Hill cited the movement towards hybrid working in response to the pandemic as a partial driver for the geographic focus on markets beyond Los Angeles, San Francisco and New York. With more Americans not having to commute or allowed to operate in separate states altogether, deal and population movement has favored cities with better weather, a higher quality of life and less urban crowding compared to the more premier metropolitan areas.