New Finance Firm Focuses on Debt, Equity

Geographically, Figueroa is looking all around the country, although it tends to gravitate toward Southern California properties in its debt placements, Conn says. In placing equity, "We will concentrate on the Southern California area because we feel that there are some very good opportunities here, but we've also been looking at a lot of other markets," he says. The company is working on a deal in Idaho and has also been looking in places like Charlotte, NC; Texas, Arizona and Las Vegas.

Figueroa represents a change of direction for its founders, all of whom formerly were with Pathfinder Mortgage Corp. in Downtown L.A., working primarily in the CMBS and life company arena. Conn explains that over the past year, as conditions changed in the capital markets, Figueroa's partners found themselves pursuing other sources of debt, including local commercial banks.

The company's founders achieved "a pretty strong success rate with closings" on debt and were also successful in assembling equity from private sources, "so it made a lot of sense for us to get much more focused on how to close quality deals in this new environment," Conn says. "One reason that we started our own firm was that we have been successful on the equity side in assembling private capital for a number of transactions over the past year," he adds. He says that Figueroa's partners wanted to continue that equity placement "in a little bit larger way," so they are preparing to go to market with an opportunity fund of probably $25 million in discretionary equity for joint ventures and other equity investments.

One of the factors that drove the formation of Figueroa is that "Borrowers' past banking relationships have become unreliable" with the demise of CMBS lending as a major source of commercial real estate finance, according to Conn. Local commercial banks serve as one of the primary sources of debt for Figueroa, which also relies on some Asian-based banks and has relationships with other brokers who have their own network of lenders.

"We have introduced commercial lending to a lot of banks that either didn't do commercial lending or—if they did it—didn't do that much of it and weren't that excited about it," Conn points out. He says that many of the local banks have capital, are stable and are willing to lend to strong borrowers with quality properties—but at lower leverage than was typical in the heyday of CMBS lending. "For the most part, our refinancings and debt are at leverage of about 60% to 65%, some up to 70%," versus the 80% to 90% leverage that was commonplace with CMBS deals, Conn explains.

The Figueroa CEO says that one reason the firm focuses on local commercial banks is that they "have a much more thorough understanding of the local property markets, have an interest in seeing their local communities thrive and want to see their borrowers be able to continue operating their properties." For the most part, these are portfolio lenders who do not sell the loans.

Figueroa's approach involves "cherry-picking deals just as a bank would," Conn says. "We pick good, strong borrowers with good, strong properties that we're pretty confident that we can get financing for, and then we work hard to get the deals closed."

When Figueroa launches its equity fund, it will be looking primarily for value-add deals. Conn says that debt for value-add deals is still available, including financing from Asian-based banks that "really understand and are comfortable with value-add plays, mini-perms and bridges and even some construction financing." On the other hand, he points out, those banks "shy away from speculative sale opportunities."

Despite the contraction in the credit markets and the slowing of deal flow, "There is still a lot of capital out there," Conn observes. He notes that local commercial banks are funding quite a bit of construction financing for performing projects and that demand remains steady for refinancings.

In addition, "There is a lot of quality property that is going to change hands because there were some issues with the financing structure or for other reasons," he says. In light of the changing conditions in the capital markets, those property sales will represent "a lot of opportunities" for companies like Figueroa, he says.