Unlocking Opportunities: The Kirkland Capital Group's Strategy for Niche Commercial Real Estate Loans
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Kirkland Capital Group (KCG) founders, Chris Carsley and Brock Freeman, recently shared their insights on the Luma Session podcast by Formidium, a global provider of fund administration services and technology solutions for fund managers across all asset classes. They are also KCG’s fund administrator. This article highlights the key points from their discussion, offering investors a deeper understanding of our unique approach to niche commercial real estate loans.
Our Journey: From Martial Arts to Managing Millions
Chris Carsley and Brock Freeman, founders of Kirkland Capital Group, met in a martial arts dojo in the 1990s where they became good friends. Their bond, built on discipline and mutual respect, allowed them to work together on several things that ultimately led to the formation of their family office. Their diverse backgrounds equip KCG with unique skills to navigate the complexities of commercial real estate loans.
Identifying the Problem: Why We Started Kirkland Capital Group
Kirkland Capital Group was founded to address a significant gap in the commercial real estate market. Chris and Brock identified a substantial unmet need for bridge loans in the sub-$2 million segment.
Borrowers seeking financing for smaller commercial properties often found it difficult to secure bridge loans from traditional lenders. Local banks and larger financial institutions typically preferred more substantial bridge loan amounts, leaving a critical segment of the market underserved. This supply and demand imbalance presented an opportunity for Kirkland Capital Group to step in and offer tailored financial solutions through bridge loans.
A bridge loan is a short-term loan used until a person or company secures permanent financing through traditional financial institutions like banks. It provides borrowers with funds to immediately purchase a property or make improvements to their current property to enhance its operations. For example, a borrower might need funds to quickly purchase a multifamily property and make necessary upgrades to generate more income, with the goal of securing more long-term financing after 12 months.
“A bridge loan is a short-term loan used until a person or company secures permanent financing through traditional financial institutions like banks.”
Combining Unique Skills: The Edge of Kirkland Capital Group
The successful formation of Kirkland Capital Group can be attributed to the complementary skills and experiences of Chris and Brock. Their combined expertise forms the backbone of what sets us apart in the commercial real estate financing landscape.
Chris is highly skilled in portfolio management, risk assessment, and fund creation and oversight. His work with institutional funds has equipped him to develop an institutional-grade fund manager and fund like KCG and the Kirkland Income Fund.
Brock brings a deep understanding of real estate finance, due diligence, and underwriting. His background includes significant experience in both real estate and technology sectors, which enables him to leverage technology and his vast network of loan brokers for sourcing loans. Brock's detail-oriented approach to evaluating borrower credibility and property value helps ensure that every loan is thoroughly vetted.
Our Investment Strategy
Kirkland Capital Group focuses on niche commercial real estate loans, particularly targeting commercial properties requiring bridge loans below $2 million. These loans provide short-term financing solutions to the borrowers while focusing on principal preservation through conservative loan-to-value (LTV) ratios.
LTV is a ratio that lenders use to represent the proportion of a loan relative to the value of an asset purchased. For example, if a property is valued at $1 million and the borrower requests a loan of $600,000, the LTV ratio would be 60%. Consequently, the borrower must provide the remaining 40%. A lower LTV percentage indicates a reduced risk for the lender.
“Kirkland Capital Group focuses on niche commercial real estate loans, particularly targeting commercial properties requiring bridge loans below $2 million.”
What Sets Us Apart
Niche Focus: We only lend on types of real estate that we understand deeply. Typically, this includes commercial real estate properties with existing buildings that can generate income within 9 to 12 months. We avoid ground-up construction and developments that might require extensive time and resources before yielding returns.
Clear Parameters: Our lending criteria focus on properties that are well-trafficked and thus more likely to generate steady income. We typically look for commercial properties like retail spaces, mixed-use buildings, hotels or motels, and small apartment complexes. We focus on existing commercial properties needing short-term financing to create positive cash flow.
Principal Preservation: Our main priority is preserving capital, ensuring that all our loans are first lien and full recourse (which include a personal guarantee from the borrower), giving us multiple avenues to recover the loan amount in the event of foreclosures.
Extensive Due Diligence: Our comprehensive due diligence process goes beyond typical asset evaluations, involving significant borrower checks and detailed underwriting procedures to ensure we partner only with trustworthy borrowers.
Risk Management: Our Pillars of Stability
At Kirkland Capital Group, we prioritize a risk-first approach. To mitigate risks, we diversify our investments across different types of commercial properties and various geographic regions while maintaining conservative valuations. This strategy is designed to reduce overall exposure.
How We Manage Risk
Broad Diversification: By spreading investments across various borrowers, commercial properties and multiple states, we mitigate risk. This strategy ensures that no single property type, state, or borrower can greatly affect the overall portfolio.
Dynamic Adjustments: Our loan rates are dynamically adjusted based on market conditions, enabling us to continuously generate excess returns.
High Skin in the Game: We require significant equity from borrowers, meaning they must invest a substantial amount of their own money into the property. This ensures they are motivated to succeed and to protect both their investment and ours.
As-Is Valuation: We base our loans on the current “as-is” value of the property rather than a speculative “after repair value” (ARV). The “as-is” value is the current value of a property in its existing condition. The “after repair value” (ARV) is an estimated value based on the assumption that repairs or upgrades have been made. This conservative approach ensures that our lending decisions are grounded in present realities rather than future projections.
Cash Flow Consideration: We evaluate the cash flows of the borrower’s operations to ensure they can meet loan repayments. Borrowers must demonstrate sufficient cash flow to service the debt during the term of the loan, providing us with confidence in their ability to repay the loan.
“To mitigate risks, we diversify our investments across different types of commercial properties and various geographic regions while maintaining conservative valuations.”
Transparent and Investor-Friendly Approach
We believe in maintaining open and transparent communication with our investors. Consistent transparency is a cornerstone of our investor relations strategy.
Communication
Monthly Newsletters and Quarterly Webinars: We provide monthly updates and quarterly webinars detailing fund performance and portfolio specifics. We do not hesitate to address any challenges that the fund may be encountering, while actively providing solutions.
Custom Reporting: We accommodate special requests for more detailed explanations to ensure our investors feel secure and informed.
Fee Structure
Our fee structure is designed to align the fund with investor interests:
Management Fee: We charge a 1.5% management fee calculated monthly on deployed capital, meaning investors only pay for funds that are actively invested, not for idle or unallocated funds.
Fund Expenses: We ensure transparency with fund expenses, which were under 0.50% last year, maintaining low overall costs.
No Incentive Fees: Instead of traditional incentive fees, where fund managers earn a percentage of profits, we collect origination fees directly from the borrowers. Origination fees are charges collected by the lender (in this case, Kirkland Capital Group) from the borrower when a loan is created. These fees cover the costs associated with creating and underwriting the loan and are typically a percentage of the loan amount. This ensures simplicity and transparency for our investors.
Economic Cycles and Stability
Our conservative investment strategy has proven resilient across different economic cycles, including periods of high inflation and elevated interest rates. By concentrating on secondary and tertiary markets, where property values have historically remained stable, we minimize potential risks. Secondary markets encompass cities or metropolitan areas that, while not as prominent as primary markets like New York or San Francisco, still boast significant populations and economic activity (e.g., Austin, TX). Tertiary markets are smaller or less economically active but continue to offer reliable investment opportunities (e.g., smaller cities or towns).
“Our conservative investment strategy has proven resilient across different economic cycles, including periods of high inflation and elevated interest rates”
Handling Defaults with Expertise
Our multi-step process for handling defaults includes UCC (Uniform Commercial Code) filings, forbearance agreements, and legal foreclosure if necessary. Implementing preventative measures, such as offering manageable payment adjustments, can significantly support borrowers during financial difficulties and prevent them from falling deeper into debt. However, when these measures are insufficient or borrowers are unable to meet their obligations despite the adjustments, pursuing legal foreclosures becomes a necessary course of action. Leveraging personal guarantees during this process can help recover the capital, ensuring that we can mitigate our losses. Balancing these approaches allows us to maintain a supportive stance towards borrowers while also protecting our investors’ financial interests.
Get in Touch
For more information about the Kirkland Income Fund, sign up to gain access to our Investor Library with all the Kirkland Income Fund documents. You can also connect with Chris Carsley or Brock Freeman on LinkedIn for more in-depth discussions.