The middle market was long served by CMBS conduit lenders. But when that market collapsed in 2008, and local banks were hamstrung in their ability to lend in early 2008, property owners had to scramble to address their financing needs. A crop of entrepreneurial investors, often backed by private equity, sought to fill the void.
Ares Commercial is just one such example. Because it will buy Ares Management’s existing portfolio, Ares Commercial will start life with a cash-flowing business, which ought to bode well for its capital-raising prospects. The other mortgage REITs that have been proposed have been structured as blind pools. In other words, they’re looking to raise public capital and promising to invest it in fresh investments that would generate attractive yields. Investors have been reluctant to bite.
Details of that portfolio, which is comprised of mortgages, have not been disclosed. But it is tied to credit lines provided by Wells Fargo Bank and Citigroup that the REIT would use to fund new investments. Wells, Citi, BofA Merrill Lynch and JPMorgan Securities are underwriters of the company’s proposed stock offering. Ares would earn a management fee of 1.5 percent of the REIT’s shareholder’s equity annually, plus a quarterly incentive fee that would be determined by the company’s profits.
In conclusion, Ares Commercial’s plan is to continue to originate and invest in commercial real estate loans on what it deems middle-market properties, that is, those with total capitalizations of $15 million to $100 million. It would provide senior loans, subordinate debt and other capital, often serving as a one-stop shop for property owners. It might also invest in CMBS.
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