Brasa Capital Management has closed its firstdebt fund, Brasa Credit 1. The debt fund willprovide debt and equity for commercial deals of up to $100 million.The debt fund is supported by pension fund investors and hasalready closed its first two deals, a $16 million preferred equityinvestment in a multifamily development in Denver and theacquisition of a $4 million sub-performing note secured by amixed-use asset in Los Angeles.

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"Before COVID-19 hit, the unprecedented liquidity in the marketfollowing a 10-year economic expansion resultedin underwriting assumptions requiring everything to goperfectly in order to make a deal work," GregGalusha, managing director at Brasa Capital, tellsGlobeSt.com. "We were getting increasingly uncomfortable withvaluations and our exposure to value; we decided to move down therisk curve to a more conservative position in the capitalstack.  Raising a credit vehicle would allow us to makemore attractive, risk-adjusted returns."

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Following the pandemic, Galusha says that there is increasingdemand for capital sources to provide liquidity to distressedowners. "The debt markets were pulling back and cash flow was beinginterrupted," he says. "There was a need from existing owners toraise rescue capital to carry their projects back to stabilizationat the end of the pandemic, and we knew our credit vehicle couldfill that need."

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Brasa's long-term strategy is focused on flexibility, and thatbusiness model will serve it well in this unexpected recession andrecovery cycle. "We've always thought that there is a lot of valuein being flexible across the capital stack," says Galusha. "Whenbrokers and sponsors pitch their funding requests, having a broaderrange of capital solutions allows Brasa to be selective andcreative in its response after assessing risk and assigning pricingbased on cash flow profiles and exposure to value."

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More specifically, the debt fund strategy will focus on capitalneeds, including acquisitions, recapitalizations, repositioningsand ground-up developments in the Western US and in Texas. "We arespecifically focused on the middle market, writing $5 million to$25 million checks per opportunity," says Galusha. "Thevehicle gives us the ability to acquire distressed debt, originatebridge loans and provide preferred equity and mezzanine debt onmost asset types."

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Overall, the pandemic hasn't changed the strategy, but Brasawill, of course, proceed with some caution. "We are definitely morefocused on markets closer to home that don't require us getting ona plane," says Galusha. "But then again, we've always been bullishon Southern California. It's one of the best investment salemarkets in the country, so there is a lot to do here in our ownbackyard. I think the only other change we made due to the pandemicis that we have pulled back on our last dollar exposure—we havegotten more conservative on that front."

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While the pandemic hasn't changed the strategy, it has changedthe demand. Rather than acquisition requests, Brasa is mostlyseeing recapitalization requests. "The majority of capital requestsrelate to recapitalizing existing deals with gap equity to fundcarry costs and anticipated capital expenditures," saysGalusha. "Gap equity is necessary in this market giventhat it now takes more time to stabilize assets, it takes longer tolease up, and some loans are requiring paydowns to effectuateextensions. Some projects are not covering their debt service andBorrowers would rather raise preferred equity/mezz since ourcapital is typically cheaper than what existing investors wouldcharge for more common equity. We also see increased demand fordebt fund capital specifically in middle market, where wespecialize. These smaller deals typically have equity investorswithout large institutional resources and the need for capital likeours is greater."

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The debt fund will keep the firm busy for the next 12 months,but it is also already planning its next steps. "Our goal is tofully deploy all of our capital in our initial vehicle andconstruct a portfolio diversified by asset type, geography andrisk," says Galusha. "At the same time, we hope to raise afollow-on fund from both existing and new institutionalinvestors."

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Kelsi Maree Borland

Kelsi Maree Borland is a freelance journalist and magazine writer based in Los Angeles, California. For more than 5 years, she has extensively reported on the commercial real estate industry, covering major deals across all commercial asset classes, investment strategy and capital markets trends, market commentary, economic trends and new technologies disrupting and revolutionizing the industry. Her work appears daily on GlobeSt.com and regularly in Real Estate Forum Magazine. As a magazine writer, she covers lifestyle and travel trends. Her work has appeared in Angeleno, Los Angeles Magazine, Travel and Leisure and more.