Everyone has heard the old saying “there’s more than one way to skin a cat.” This adage is especially true when it comes to real estate investing. Although many people think of income from rental revenue as the best way to make money on real estate, real estate-related debt can also be an equally lucrative investment. For proof of this, you don’t need to look any further than a recent Yieldstreet debt investment that generated a 41% return for investors.
Like most investment platforms, Yieldstreet is always on the lookout for ways to generate wealth through different offerings. A little over a year ago, it had the opportunity to purchase two underperforming real estate loans that were tied to a mixed-use development in Brooklyn, New York. Under normal circumstances, buying a mortgage that a developer is struggling to pay is a risky proposition.
However, Yieldstreet took a deep dive into the numbers and saw an opportunity. There were some specific fundamentals about this deal that made it attractive. First, the loans were first mortgages, also known as “senior debt.” This means that Yieldstreet would be in the first position in front of other creditors when the loan was repaid or the asset was foreclosed on.
Second, the fact that the mortgages were underperforming meant Yieldstreet was able to acquire the debt at a tremendous discount in relation to its value. Third, the property was in Williamsburg, Brooklyn, which is one of America’s hottest real estate markets. Finally, the original loan was short-term mezzanine financing that called for investors to be paid back at 15% to17% for the 36-month hold period.
The Payoff
The investment sponsor, Invictus Real Estate Partners, wasted no time in moving aggressively to make this offering a winner. It initiated a foreclosure action on the subject property at the same time it purchased the debt. Because it purchased the first mortgage on the property, this action put them on the title for the entire development.
During the foreclosure process, a special receiver was appointed to manage the project’s finances and oversee its cash outlays. While this was going on, Invictus undertook an aggressive effort to lease out the property's vacancies, increasing its revenue. Invictus negotiated a settlement with the borrower on the debt side that included a $104 million cash settlement.
Those funds were used for the purposes of paying off the existing loan, but it also increased the returns for Invictus by raising the interest on the debt. Another aspect of the settlement agreement required the borrower to pledge $9 million to pay off Invictus’ operating costs on the property. This payment covered the money Invictus spent out of pocket on the project, such as tenant improvements, legal fees and property taxes.
Obviously, that’s an impressive array of guarantees and incentives for the project sponsor. Invictus extracted all these concessions in exchange for delaying the foreclosure hearing for three months from May 2022 to August 2022. The delay gave the borrower time to seek additional options for refinancing the mortgage. On July 29, the original borrower secured a new loan, which paid off the existing debt, including Invictus.
By the time it was all said and done, Invictus and its investors made a tidy 41% gain on a discounted loan it bought for $9.8 million dollars and held onto for just a few months. This deal demonstrates that while property appreciation and annual revenue are great ways to build wealth, they are not the only ones. Leveraging debt at the right place at the right opportunity can also yield tremendous returns.
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