Arctus Capital, a Bend firm that specializes in making short-term bridge loans to commercial property buyers and developers, announced earlier this week it had hired Bend developer Stephen Trono to join the firm’s executive management team.
Trono is known for his plans to build a $75 million condominium and mixed-use project — known as the Mercato — on the site of the old crane shed in Bend’s Old Mill District.
Lesser known is Arctus, which was founded by Bend attorney Greg Stuman. In the last 12 months, the company has lent more than $43 million to its clients to purchase or develop properties around the U.S., but none in Central Oregon so far, said Stuman, also the firm’s CEO. Banks may have curtailed their lending and tightened their credit requirements, but for private lenders, that means it’s a great time to be in the market, Stuman said.
“We’re kind of a bright spot,” Stuman said. “The credit markets are still extremely tight. Lending guidelines are so tight that (banks) can’t close a loan if one thing is wrong. We can.”
Arctus, which is based in an office in the Franklin Crossing building in downtown Bend and employs seven people, primarily lends money in the form of so-called bridge loans. They are short-term loans, typically ranging from 60 days to 12 months, and carry higher interest rates, generally around 14 percent. The money comes from accredited investors, primarily on the West Coast, and there are usually four to 10 different investors in each loan, which range from $1 million to $5 million, Stuman said.
The higher interest rate is a cost a borrower is willing to bear because bridge loans can provide capital faster than through traditional lenders, Stuman said. But the higher interest also means bridge loans are typically held by borrowers for short periods of time.
For instance, a borrower might seek a bridge loan in order to purchase an investment property because he’s worried the property will be snatched up before the borrower can secure conventional financing. Then, once the borrower has used the bridge loan to purchase the property, he will attempt to refinance the property with a conventional loan at a lower interest rate in order to pay back the bridge loan.
Stuman said bridge loans also are used frequently to help owners and banks refinance properties. In one example, the owner of a commercial property wants to refinance a conventional loan with his bank but is unable to do so because the terms aren’t favorable to either the lender or the borrower. A bridge loan could be used to shore up the borrower’s finances, putting the property back on a solid footing with the bank. In this way, Arctus has helped the owner “reposition” his property to make it more attractive to a bank.
“It’s complicated,” mused Stuman. “That’s a problem with this business.”
The loans are often secured with the underlying properties. As a condition, Arctus becomes the senior lien holder while the loan is out. Arctus doesn’t invest in single-family homes or developments, Stuman said. It primarily focuses on commercial properties, such as apartment complexes and mixed-use developments.
That’s where Trono comes in. Stuman said Trono will help Arctus determine which of its potential borrowers’ developments have the best chance of succeeding and take over management of the development should the borrower default, though the firm’s default rate is roughly 1 percent, according to Stuman.
“You have to be careful to take on viable projects, ones we can take over if we have to take it back,” Trono said. Trono also will help the firm line up investors to fund its loans.
Trono has developed more 24 real estate projects in the state, according to his bio, including a number of residential developments in Central Oregon such as Terrango and Lava Ridges in Bend and Wild River in Sunriver. Trono said he’s still pursuing development of the Mercato and has agreements with the city to phase the project’s construction over the next few years. Arctus will not be involved with its development, Trono said.
There isn’t a national or regional entity that tracks bridge loans, but it’s obvious that traditional lending institutions have been hit hard by the recession, said Kenneth Simonson, chief economist for the Arlington, Va.-based Associated General Contractors of America.
“Clearly there are lots of projects that make economic sense, but so many lenders have been traumatized by the recession that there has been an overreaction, too much pulling back,” Simonson said.
Stuman said Arctus’ loans have helped buyers and developers across the country, including Gary Saterbak, a commercial property investor from San Diego. Saterbak used a bridge loan from Arctus to purchase a bank-owned apartment complex in Michigan that he and his other investors planned to renovate.
Based on his initial discussions with a bank in Michigan, Saterbak said it was going to take six months to secure the loan he and his investment team sought. Arctus was able to fund its loan within three weeks, he said.
“With Arctus funding, we were able to leverage up and it gave us some breathing room to get the property repositioned and refinanced at a higher value,” Saterbak said. “It allowed us to execute our business plan.”
Stuman is a 1985 graduate of Mountain View High School who also holds an undergraduate degree from Willamette University and a law degree from the University of San Diego. After law school, he worked for a San Diego firm that helped find buyers for much of the real estate that was a victim of the savings and loan crisis in the late 1980s and early ’90s. He said he returned to Bend for the quality of life and founded Arctus 18 months ago, largely in reaction to the deteriorating real estate market.
“When I saw the markets failing, it reminded me of the ’90s, with prices down 50 percent and banks failing,” Stuman said. “Where I cut my teeth was creating orderly methods to re-establishing the real estate market, and that requires private money to create a bottom.”
Stuman, who disdains the government’s stimulus efforts, believes market forces and private money will help the economy recover at a quicker pace. There are “lots of diamonds in the rough out there” that are being integrated back into the economy thanks to private financing such as bridge lending, he said.
“I’d say anything moving at all right now is because of private money,” Stuman said.