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Quick Deals Drive Partners Capital Solutions' Small-Balance Lending

Veteran California-based real estate investment and finance pros Gary Leff, Michael Klein and Stanley Kafka logically perceived promising opportunities as the housing bust morphed into a full-fledged credit crisis.

With an initial eye toward financing entrepreneurial investments into residential distress in western US markets, the trio founded Partners Capital Solutions three years back to offer opportunistic clients a corresponding roster of customizable debt and equity programs.

And lightning-fast underwriting and approvals.

Indeed much of the initial activity entailed helping sizable specialists finance opportunistic acquisitions of distressed single-family dwellings - with some acquiring several hundred homes each year. PCS raised investor capital and often provided these clients with credit lines allowing for fast closes.

"We've been able to provide consistent and timely funding for their operations," says Klein, who along with Kafka holds the managing director title at the Calabasas-based firm.

But as lenders have become more active disposing of distressed commercial assets, PCS's fast-growing activities have predictably come to focus more on small-cap retail, industrial and self-storage properties. Much of today's activity helps commercial-minded borrower clients acquire favorably-priced assets directly from note-holders, or through auctions.

In addition to acquisition credit lines, PCS's programs include bridge loans, mini-perms, equity, and even a pretty active construction-lending platform. Most of the funded projects have total capital requirements in the range of $2.5 million to $10 million. PCS last year funded 40-plus transactions totaling about $70 million - with 2012's activity already more than 15 percent beyond that figure.

After a period of predictably slow development activity, a notable chunk of PCS's funding is also making its way into build-to-suit projects for national retail chains of late. This includes a half-dozen California developments housing an expanding national discounter chain, multiple transactions involving major bedding and fitness operations - and even a couple public agency facilities.

But the PCS brain trust is still generally leery of the office sector - due in part to continued high tenant-improvement and leasing-commission costs required to fill so much vacant space. The firm likewise tends to steer clear of assets that behave more as operating businesses than real estate investments - such as hotels and assisted-living facilities.

As the principals expect supplies of and demand for distressed assets to generate needs for PCS's programs for at least "a few years" as Klein puts it, the firm continues looking to expand activities beyond its Golden State base. PCS is funding client activities pretty much throughout the West (Texas included) - and is willing to consider transactions favored borrowers are pursuing even far beyond the region, Klein notes.

PCS works through extensive mortgage banking contacts in its home state, and recently established a correspondent relationship for Arizona with Churchill Commercial Capital. "And we are discussing similar arrangements with mortgage bankers in nearby states," Klein notes.

While PCS's funding doesn't exactly come cheap, what's really meaningful to clients are the speed of underwriting and funding, and the certainty of execution, Klein stresses. "We are not cheap, but we are certain," Klein comments. "BMW and Mercedes aren't as cheap as a Chevy or Toyota - but they still sell a lot of cars."

And that certainty along with speedy execution can provide considerable value in today's environment, he also emphasizes.

"If you can use our money buy an asset and lock in a million-dollar profit, it shouldn't matter that the money might cost $100,000 more than with some uncertain source," Klein elaborates. "Would you rather definitely earn $1 million - or maybe earn $1.1 million?"

Clearly lots of clients prefer the former - motivated in part by PCS's ability to frequently close transactions just two or three weeks after receiving the completed application. Indeed a key element of this strategy entails insisting that applicants provide all the pertinent information in a single, highly organized and thorough transmittal.

"We can size up a deal very quickly," Klein relates. "We know whether we want to move forward or not."

Of course that ability reflects the broad and deep background of Leff, Klein and Kafka as well as PCS's outside board comprising its investment committee. Leff has been a highly active real estate investor and developer in Southern California over the past four decades. And Klein and Kafka each boast multiple decades of high-level real estate banking experience: the former with the likes of Imperial Capital and Wachovia; the latter at City National and Union Bank.

Coupon rates on PCS bridge loans and mini-perms start at 7.5 percent, with construction facilities starting at 10 percent, and 12 percent with foreclosure credit-line outstanding balances. Loan fees start at 2 points, including the one-time fee for credit lines based on the committed amount.

Klein acknowledges that there are more competitors playing in PCS's space today than when the firm was founded - and that debt rates within its programs have generally declined 100 to 150 basis points over that period.

The crew's long experience likewise provides PCS with extensive investor relationships, making for a solid network to tap for opportunistic capital. And in fact that network also remains the key source of capital through which PCS leverages it commingled fund dollars. As Klein explains, "unfortunately we have not yet found a bank that can compete with our base of private lenders on rates, terms or ease of doing business."

Whether or not it finds the right lender, the team expects to continue finding plentiful opportunities in its favored categories - as long as investors don't bid cap rates dangerously downward. "The question is whether low yields will drive risk-taking back to 2006 levels," Klein relates. "Lessons learned seem to only last a few years."