Afraid That Treasuries Are The Only Options For The Next 12 Months? This CRE Firm Says No
Emily Lynch, Studio B Writer
October 16, 2023
As market uncertainty continues, more investors seeking low-risk investment opportunities are turning to treasury assets, such as certificates of deposit, or CDs, mutual funds and savings bonds.
CDs have reached a return rate of upward of 5%, a figure that the market hasn’t seen in more than 20 years. In 2021, CDs sank to record lows of 0.26%, leaving investors to weigh their chances on riskier investments in exchange for a higher return.
Many investors, however, don’t have the same appetite for risk they did several years ago due to persistent interest rate hikes over the past 18 months and recessionary fears. This volatility has led to a decline in CRE investment, leaving some investors sitting on the sidelines with an abundance of capital, unsure of where to best allocate their money.
“One of the sectors that performs the best during inflationary periods is leveraged real estate,” said Dwight Dunton, CEO of Bonaventure. “And Bonaventure’s risk-adjusted, tax-efficient investment solutions provide a balance between market exposure and safety.”
Bonaventure has a suite of real estate investment solutions for investors. Dunton said that oftentimes Bonaventure’s equity sits below investors’ in a higher-risk position — something many investors find comforting.
“It’s all about where you fit on the capital stack,” he said. “Because we’re showing potential investors how much we believe in these deals with our capital sitting behind theirs, it gives them that confidence they need to enter a deal.”
Bonaventure’s investment solutions include perpetual offerings and fixed offerings, or preferred equity/joint ventures, in a wide variety of real estate deals. To help investors increase their operations and cash flow, the firm focuses on joint ventures, acquisitions and recapitalization efforts.
“Essentially, we connect capital to great real estate,” Dunton said.
The firm’s perpetual offerings are something that investors can partake in forever if they choose. These solutions are moderately illiquid, and investors have the chance to redeem when there are shares available, he said. On the other hand, the fixed offerings have a finite amount of time with an exit plan in place.
“Another very crucial part of our investment solutions is that we’re one of the largest HUD borrowers in the nation, meaning we’re able to get long-term debt, mostly 20-year fixed rate, on our CRE assets,” he said.
Dunton said $1.5T of commercial real estate debt is coming due in the next 1.5 years. If banks aren’t lending, the market will see more scenarios where people are handing back the keys because the loan is worth much more than the value of the real estate.
“When you have 20-plus years of fixed debt on your portfolio, you’re not in the same ballgame anymore,” he said.
HUD loans offer more of a risk-reward balance, Dunton said. Investors won’t see the giant surge — things are going to be steadier, more consistent and “more boring,” which Dunton said is what a lot of investors are looking for in this “risk-off” environment.
Bonaventure’s investment solutions are also beneficial to the investor in terms of tax efficiency.
He said that oftentimes, new development projects have accelerated depreciation, meaning investors can receive a fair amount of depreciation early on in the investment. While the project is being developed, there is no capital coming in. Due to depreciation expense, there is no taxable income. However, they will receive a distribution or a return of the capital they originally invested. This is often dubbed tax-deferred income.
“We focus everything we do on making sure income that comes out is done in a tax-efficient manner,” Dunton said.
Bonaventure’s suite of solutions can cater to a wide variety of people. Bonaventure is focused on meeting the needs of investors who need to deploy cash or already own pieces of appreciated real estate. Where tax considerations become a primary driving factor of investment issues is where Bonaventure fits into an investment strategy.
Dunton said that while there is no way to take the full risk out of the equation, achieving a balance between overtly risky investments and treasuries that are too safe is of paramount importance to the firm. Bonaventure does this by strategically placing capital, keeping its high-quality debt in line and investing in locations the firm believes have strong potential: the Southeast and mid-Atlantic regions.
“In today’s environment where the risk-free rate is above 5%, by definition, investors needing greater returns will need to take some level of risk,” he said. “Our job is to minimize risks while helping investors achieve greater returns than by simply leaving their cash in the bank.
“It’s not about eliminating risk. People want to put their money to work. It’s about understanding the risks and having the appropriate amount of risks and rewards when you are entering one of these deals.”
This article was produced in collaboration between Bonaventure and Studio B. Bisnow news staff was not involved in the production of this content.