2020 was a record-setting year in many ways. The COVID-19 pandemic raged around the world, forcing businesses and private citizens into lockdowns of varying duration. It saw record levels of unrest as protestors demanded social justice and racial equality. 2020 also ushered in a record-setting year for wildfire damage in California. All told, almost 10,500 structures were damaged or destroyed, and the fires claimed 33 lives across the state, as they consumed over 4.2 million acres. However, The Golden State is resilient. We are rebuilding California homes and businesses, but not at the speed that we want to. These efforts are being hampered by a lack of access to funding. Construction companies, real estate developers, and other businesses traditionally at the forefront of the construction industry are facing tight financial times.
For investors, the current situation represents a two-fold opportunity: the ability to help fund the rebuilding of California’s damaged infrastructure, while simultaneously earning a high return on that money. The North Star Capital Fund represents an innovative solution to rebuilding California, solving the funding challenge currently shackling real estate development, new construction, and rebuilding efforts, as well as to investors’ innate need to grow their wealth.
First, we want to help you understand the roadblocks homeowners and builders are experiencing in California. After, we’ll highlight the ways in which the North Star Capital Fund addresses these issues, and how you can earn 10%-12% annually while helping rebuild California.
Rebuilding California: It’s Complicated
The California Rebuilding Fund
In November, California Governor Gavin Newsom announced the California Rebuilding Fund. According to a press release published by the governor’s office, “The California Rebuilding Fund is a public-private partnership that drives capital from private, philanthropic, and public sector recourses – including a $25 million anchor commitment and $50 million guarantee allocation from the California Infrastructure and Economic Development Bank (IBank) to Community Development Financial Institutions. With this new Fund, California’s CDFIs will be better able to help under-banked small businesses recover and reposition themselves.”
However, there are some significant challenges with the Fund. One of those is that it is not truly a move in response to the devastating wildfires. Instead, it is a reaction to the effects of the COVID-19 pandemic on California’s economy, in particular on small businesses. This carries with it some significant implications:
- While construction companies and real estate developers can apply, they must compete with small businesses from every other industry.
- The Fund requires construction-industry businesses to apply with conventional lenders, which are notoriously hesitant to back real estate projects.
- Obtaining funding through this program requires an application, and then a long wait to be matched with a lender. In some cases, there may be no lending partner available for construction-industry businesses.
Other State-Sponsored Funding Options
While the California Rebuilding Fund does offer at least some vague promise of relief for construction and real estate-related companies, it does too little for most organizations. Unfortunately, there are few alternatives available at this time, at least in terms of state-sponsored financial programs. This is even though almost 10,500 structures were damaged or destroyed during the fires and the incredible need to begin rebuilding from the ground up.
Where Does Rebuilding California Stand
California is a big state, and the construction/real estate sector is correspondingly large and varied. For some areas of the state, the wildfires have had little impact. For others, the demand for skilled crews, knowledgeable designers, and reputable companies means a backlog of work and residents sometimes waiting years for houses to be rebuilt and new projects being delayed as developers and construction firms are forced to split their efforts. Some of the key takeaways of the current situation in the state include the following:
- Demand for construction/development services continues to be at all-time highs, often leading to longer waits for project completion.
- New laws and construction regulations related to fire resistance may further complicate the situation, leading to project delays.
- Developers and construction companies being unable to obtain funding for projects from conventional lenders further slows industry growth and project completion.
- Homeowners are unfamiliar with construction loans and often unaware that they are underinsured on their homes, leading to the need to finance rebuilding in the first place.
The Sticky Situation of Insurance and Construction Loans
While the limited access to construction loans is a challenge to construction and real estate industry organizations, it also has a dramatic impact on California homeowners. Residents who have already had their lives turned upside down by the damage or destruction of their homes are further affected when they learn that their homeowner’s insurance policy may not be sufficient to rebuild the home. This leaves them on the hook for tens, perhaps hundreds, of thousands of dollars.
The Santa Rosa Press Democrat published a news story revolving around precisely this. A family lost their home in the 2017 Tubbs wildfire. After the fire, the family received $12,000 in support from crowdfunding, as well as a fire relief fund. Thinking they were soon to be on their way to rebuilding the home, they were shocked just a few months later to learn that not only would their insurance not cover the cost of the rebuild but that they would have to find a way to foot the bill of $200,000.
Eventually, the family was able to obtain a construction loan, but the process was fraught with pitfalls and problems, including:
- The family had to put up nearly $90,000 in cash upfront before the insurance kicked in.
- The family tried to apply for multiple loans but was either turned down or told that the lender did not offer construction loans.
- The family found that to get a construction loan in the first place, they had to pay off the existing mortgage.
Many conventional lenders are simply not equipped to offer construction loans. Those that do often do not work with rebuild projects. New home construction is one thing, but rebuilding a home after a disaster is something else entirely.
A Ray of Hope: The North Star Capital Fund Offers Help in Rebuilding California
If capital is the single largest hurdle in rebuilding California, then the solution is to find new, innovative ways of getting money to the organizations that need it most. That includes construction companies, real estate development firms, architectural firms, and others in the construction and real estate space. Of course, the challenge is that conventional lenders often do not welcome these borrowers with open arms.
The solution? Innovative funding options that address the core challenges and are designed to handle the unique complications inherent in California’s real estate and construction industries. The North Start Capital Fund is one such option.
What Is the Fund?
The North Star Capital Fund is a unique solution that offers access to the capital required by construction companies, real estate development firms, and others. However, these loans differ from those offered by conventional lenders. Some of the most important differences include the following:
- Backed by Private Investors: The capital within the fund comes from private investors. Private investors are less risk-averse than conventional lenders, which means these loans are more widely available than conventional options, and offer a great deal more flexibility, too.
- Short-Term Lending: Unlike conventional lenders, which primarily make a profit on interest charged over loan terms spanning many years, private money construction loans are much shorter-term. They last between six and 18 months depending on the situation. Shorter terms help reduce risk to private lenders while offering borrowers a faster time to repayment.
- Debt Secured: All loans originated within the North Star Capital Fund are secured by real estate. However, additional guarantees are often provided. This further reduces risk while guaranteeing a return even in a worst-case scenario.
- Tied to Real Estate Cycles: Unlike other lending options, the North Star Capital Fund originates loans tied directly to real estate cycles. This deep correlation ensures more informed decision-making processes, less risk, and better returns for investors while accelerating the construction process.
- Works with Homebuilders and Developers: In the conventional real estate financing scenario, a homebuyer applies for a mortgage directly with the lender. As we learned previously that situation is often difficult when home rebuilding after a fire. The North Star Capital Fund works with homebuilders to provide funding for home rebuilding and reconstruction, renovation, new builds, and more. These organizations are well-positioned to help displaced homeowners begin to get back into their homes.
Accelerating the Construction Process
Without a clear route to financing, the construction process slows and stagnates. Families are left without a home, living in emergency shelters or competing for scarce rental property. Likewise, builders and developers find themselves at a standstill – unable to help families rebuild without a means of getting paid.
The North Star Capital Fund offers the means to jumpstart the construction process by providing builders and developers with access to critical financing options. Those companies can then provide their customers with access to funding that would be either difficult or impossible to obtain through conventional means. In short, it becomes possible for those families to begin picking up the pieces of their shattered lives and beginning the rebuilding process.
The fund also offers additional benefits. Because it is completely funded by private investors, it offers Accredited Investors (both organizations and individuals) the opportunity to offer a helping hand while seeing a consistent above-market return on their investment.
How Does the Fund Work?
The North Star Capital Fund has three primary objectives:
- Preserve principal
- Provide current income
- Achieve consistent returns
It focuses on achieving those goals through secured senior deeds of trust, supplemented by a smaller concentration of secured junior deeds of trust and/or preferred equity investment on residential and commercial real estate. All loans originated by the fund are short-term in nature, with terms between six and 18 months.
What Investments Will the Fund Make?
While the fund is an investment vehicle, not all real estate investments are of the same quality. To ensure value to borrowers as well as a return for investors, the fund manager closely adheres to specific characteristics when determining which investments to make (loans to originate). Each loan is evaluated on a case-by-case basis, but most investments will share specific characteristics, including:
- Focused on properties in California
- LTV (loan-to-value) of up to 75%
- LTC (loan-to-cost) of up to 85%
- Short-term loans (six to 18 months)
- Average loan amounts between $150,000 and $2 million
- Lender’s Title policy and builder’s risk insurance to protect properties
- Prepayment penalties if applicable
- 10% contingency on renovation loans
- 5% contingency on new construction loans
- Full recourse guarantees from a qualified guarantor
What Loan Types Are Available?
The North Star Capital Fund works with builders and real estate developers, as well as other real estate and construction businesses, to make several different loan types available to accelerate construction and aid in rebuilding California. These include acquisition, acquisition and renovation, new construction, entitlement and development, refinance, and cash-out loans.
What Return Can Investors Expect?
The North Star Capital Fund provides a preferred return of 8% per annum, with quarterly distributions to investors. This is supplemented by a 50/50 split of any excess distributable profits, for an estimated return range of 10% to 12% annually. Please refer to our prospectus for a full disclosure of risks.
Rebuilding California, One Loan at a Time
It is time to put 2020 behind us, and for many California families, that means finding a way to rebuild their homes. The North Star Capital Fund offers an innovative financial product designed to jumpstart the construction process and avoid the many problems with conventional loans and lenders. In its own way, it offers an opportunity for investors to “do well while doing good”.