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October 2006
Disciplined Deals for Opportunistic Real Estate Investments
By Lisa Hoffmann

Meeting Peter Fioretti, chief executive officer of Mountain Funding, L.L.C., one is immediately struck by his casual demeanor. If you were expecting an Armani suit and silk power tie, forget it. This fit and energetic guy turns out in crisp jeans and a polo shirt, albeit with a sharp crease ironed into each sleeve. His office in tawny Ballantyne Corporate Park is understated and efficient, the staff friendly and welcoming. But one look at his desk and you get a clear picture of how Fioretti functions. The polished wood desk is of the stand-up variety so that he can work, blue tooth-enabled wireless telephone headset carefully secured in place, while moving freely around his office. Stacks of carefully arranged paperwork sit all along its u-shaped expanse.

“I hardly ever sit down when I’m working,” Fioretti says, fidgeting even as he sits courteously across the conference table. That polo-shirted exterior and “call me Pete” demeanor belie a whirling powerhouse of financial fortitude leading a commercial real estate funding firm that backs opportunistic – and potentially risky – transactions nationwide as one of the largest private lenders in the country. Fioretti has learned the art of self-discipline to an exquisite turn and it extends through everything he does.

 

The Low-Down on Hard Money

Mountain Funding specializes in funding commercial real estate transactions with “hair,” an industry term referring to complications. “Hairy” predicaments might involve distressed debt or partnership buyouts, bankruptcy issues, borrower background issues, or, more often than not, simply the need for a quick – sometimes within two weeks – closing. Under-performing projects have the potential for significant value increases with management changes, renovation, expansion or conversion. Sometimes a developer has the opportunity to acquire property well below market value because he’s had it under option for a while, he’s dealing with a distressed seller, or he has an inside on the marketplace and was able to negotiate a deal before it went to market. In any of these cases the developer needs to move fast to secure the deal. But hair will cost you. One-year term rates start at 10 percent, but are supported by above-average returns to the borrower because of the opportunistic situation. Most times, the investor’s returns allow even the priciest terms to pay off.

“Oftentimes, opportunistic equals extremely profitable for developers,” Fioretti says. “The typical equity investor takes a large percentage of the profit off the back end. Rarely will they go in for a fixed return. Developers can keep more profits by capping out the return with us.”

Mountain Funding also provides short-term capital requirements needed to bridge a gap. But here’s where discipline once again comes into play. Fioretti and his staff will not agree to any deal that doesn’t have a reasonably assured exit strategy built in. In hard money lending, risk assessment is the name of the game. Being selective is the winning strategy. Discipline, it’s all about discipline.

About 100 deals are presented for the firm’s consideration each week. Of those 100 deals, Fioretti and his team typically consider about five. Of those five deals, the firm will sign on for only about one every other week. If an initial due diligence team determines the deal looks likely to close, Fioretti hops a plane and goes to see the property himself.

“We’ve been doing this a long time and we have a good gut feel for it,” Fioretti says. “I see the property, I meet the developer and I make the final decision as to whether we do the deal or not. My investors seem to really like that. I also have a great senior team, all of whom have a personal investment in the company and in the deals. Everyone has an extensive development or investment background. This is not typical in the industry.”

If an investor has less than 30 days to close on a deal, needs $10 million or more and/or there’s a complicated story behind the deal, chances are he’s going to find his way to Mountain Funding or a similar firm. Sometimes the investor has already gone to a conventional bank at 60 to 90 days out but the bank came back and said, “No, it’s too risky, too high leverage, or too complicated.”

“Sometimes banks simply don’t understand what the risk is,” says Arthur Nevid, the firm’s managing director. “There may be an environmental problem on the property and the bank has a policy against environmental issues. But the problem may be very manageable.”

Mountain Funding offers flexible options such as mezzanine debt, where the lender provides the money that is above what is otherwise deemed conventional senior debt. For example, if a developer is buying a property for $20 million in an opportunistic situation, a typical lender might lend him 70 percent. A mezzanine lender might be willing to lend up to 90 percent, filling in the 20 percent left after 10 percent equity is left on the deal. That 20 percent is the “mezzanine.” This reduces the developer’s capital investment from $6 million to $2 million, which may be enough to help him close the deal. To make things easier, Mountain Funding also offers the whole 90 percent, not just the mezzanine debt piece, so that there’s one lender, one set of documents and one set of lawyers. These transactions have become industry standard on Wall Street, but not in private lending, according to Fioretti. Mezzanine financing gives developers the high leverage they love without giving up equity profits.

“Our reputation in the industry is that we deliver,” Fioretti explains. “So the developer is happy to pay us what he pays us because we close as promised and he’d rather have us than either not have a deal at all or have an equity partner that controls him and takes a much larger piece of the profits.”

 

Charlotte By Way of Hoboken

Fioretti worked in banking on Wall Street right out of college. Unable to afford a fancy Manhattan apartment, he rented a place in Hoboken, N.J., previously “a slum” before gentrification began by his description, but just a four-minute train ride from Manhattan. He noticed a lot of other suit-and-tie businessmen getting off at the Hoboken stop every night after work. He talked 12 college buddies into investing $5,000 each to buy the apartment building he was living in and then negotiated a joint venture deal with a local builder to do a condominium conversion.

“We made a heck of a profit on that deal,” Fioretti remembers. “Then my buddies’ dads began investing in subsequent real estate ventures. I quickly moved from banking into real estate.”

On his 25th birthday Fioretti quit Wall Street altogether. Within three years he built up a $150 million portfolio in Hoboken and Jersey City. But he grew dissatisfied with the amount of time he was spending managing his 100 employees, leaving little time for involvement in the real estate dealings themselves. He sold off the company’s assets in 1988, a great time to sell, and made enough to begin investing in other real estate developers.

Things went along swimmingly until about 1990, when the market began to decline. In the early ’90s he was left with a handful of investments with other developers, developers that couldn’t make good on their loans. As an investor he was involved with the workout negotiations. The banks were impressed with him and hired him as a real estate investment consultant.

“As a consultant I helped work out some of the deals where the developer and bank could agree on a deal but neither had the capital to invest in making it work,” Fioretti explains. “That’s when I decided to finance some of those deals. I contacted my old investor group and started Mountain Funding in 1993.”

The firm started by funding small local deals and within a year it had attracted institutional investors. In 1997 Arthur Nevid was hired to take the program national. Realizing that with a national company he could live anywhere, Fioretti searched for a place that was pro-business, had great growth potential, offered easy access for traveling that was in a moderate climate and had a young, family-friendly demographic. Charlotte fit the bill.

“Everyone’s been just great since I moved here,” Fioretti says. “From the business people who helped me meet the people I needed to know to the people who helped us get our two young children situated in school. We knew right away that we’d made the right choice.”

All that introducing around paid off in a big way a few years after Fioretti relocated. Wachovia became Mountain Funding’s largest institutional lender in the summer of 2002.

 

No Smoke, No Mirrors

Okay, so Mountain Funding offers capital to investors taking advantage of highly opportunistic deals in the hopes of a big payday. One of the greatest advantages they offer is a quick closing with dependable delivery on the promised date. How do they do that?

To prevent “hair” from clogging up the works, Mountain Funding relies on a vast network of due diligence specialists, made up of third-party national firms, that moves very quickly in a focused way to assess the risks of a deal, get through due diligence and get to closing. Rapidly moving through due diligence is expensive. To get an appraisal firm to produce an appraisal in a week or two, when it typically takes a month, requires the proper motivation.

“For an additional ten or twenty thousand dollars the developer can close on a $50 million deal in 30 days with us versus 90 days with someone else,” Fioretti says. “By waiting 90 days he would have missed out on that deal.”

Quick, reliable closings are what help keep Mountain Funding ahead of the competition. Fioretti cites several national funding organizations as his biggest competitors but says he doesn’t lose sleep over the competition. The heads of each of these firms engage in friendly information sharing with the knowledge that there are plenty of opportunities to go around and that each firm has its strengths. It’s usually clear which firm is the best for a particular deal and if they want it, they get it. Competition isn’t Fioretti’s major concern. His focus is on staying disciplined for the next big thing in investing: waiting for the real estate bubble to burst.

“Every market is different, but there are places in Arizona, Florida and California where prices have appreciated 20 to 30 percent per annum,” Fioretti explains. “Those markets are in the midst of a downturn right now. Many people are still in denial, but it’s a fact. Those markets are going to take a short-term sharp decline in prices and absorption. I believe there will be a liquidity crisis for residential and land deals across the country, and we are poised to fund the types of deals that take advantage of that marketplace. There will be opportunities to purchase distressed debt and finance workouts. The trick is in the timing. We need to be disciplined, sit back and wait until the time is right to start dealing.”

Several times in the last decade there have been liquidity crunches in the market place. With each financial crisis investment money dries up, causing loan defaults and difficult deals. Mountain Funding has a distinct advantage in that it has had the same institutional equity partner since 1994, a partner that started with a $7 million fund and manages a $2 billion fund today. “It was a marriage made in heaven,” Fioretti says. As luck would have it, lots of opportunistic situations arise when the market goes sideways. With a stable capital partner, Mountain Funding has been able to close profitable deals throughout each crisis. “Those were challenging times but also very good times that let us go to the next step,” Fioretti says.

The formula is working. Four years ago, Mountain Funding’s annual capital investments were in the $25 million range. Last year, they topped $400 million.

With the thought of an impending real estate crisis fresh in his mind, Fioretti can sit no longer. He jumps up, bids a polite goodbye and heads back to his office, speaking under his breath. “It’s time to go make some money today.”

Lisa Hoffmann is a Charlotte-based freelance writer.
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