The Nikols Co. in Newport Beach is part of an ongoing clearing-out process in Orange County, where a steep drop in residential real estate values during the recession has been followed by the rise of a crop of bargain hunters.
Houses weren’t the key focus when Principal Don Nikols formed the bridge lender in 2007 with his wife Carrie, its chief lending officer.
The company’s inaugural fund was designed to finance offices, retail and industrial buildings. Its first loan was made to buy and improve a Chili’s Grill & Bar restaurant.
“That was 2007,” Don Nikols said. “In 2008 things got very messy in the capital market. Financing for offices was in turmoil. When we were brought the opportunity to have pools of houses to have as collateral, we thought that was much safer.”
Since then the firm has zeroed in on the residential market, lending to corporations or limited liability companies that buy pools of distressed homes at foreclosure auctions or banks, repair the homes, and sell them for profit.
Single-Family Market
A depressed single-family housing market has helped prompt an increase in rental properties in recent years, as well as an increase in “rent-and-hold” buyers, whose tactic is to buy discounted homes and rent them out, holding the properties until timing becomes more favorable to sell. The Nikols Co.’s borrowers don’t typically target that niche.
“Our model is designed for operators that buy, rehabilitate and sell,” Nikols said. “Our borrowers that have been buying primarily at foreclosure auctions … have been experiencing increasing difficulty buying at the lower price range as they have been overbid by the growing number of ‘rent-and-hold’ buyers.”
Most of the firm’s investors are real estate professionals who understand the industry, according to Nikols.
Many have now come to focus on this business model, “as it represents a bright spot in an otherwise beleaguered real estate landscape of illiquid and poorly tenanted commercial properties,” he said.
Commercial
The company expects commercial real estate activity to eventually pick up, although progress might come incrementally.
“We’ve just decided that, in this world right now, we’re going to stick with our houses, certainly through this year,” Nikols said. “We … can recognize an opportunity when it hits us. But right now, there’s a wider-than-normal segment of opportunity for private-money lenders.”
The residential market, generally speaking, remains in recovery mode. An uptick in foreclosures is clearing excess inventory, but prices have continued to slip in recent months and any sales gains have been modest.
Plans
Nikols currently works with 11 borrowers and plans to add another five or so in coming months. More than 800 houses have been purchased using credit financed by the Nikols Co., which represents about $100 million.
The Nikols Co. has about $30 million in assets under management and expects to put out another $15 million to $20 million by the end of the year to finance home turnarounds, Don Nikols estimated.
Going all-out on houses has brought the firm good yields so far.
The firm has been reaping 8% returns for its investors, while consistently upping its revenue for the past four years. It is on track for a projected $2.2 million in fiscal 2012 revenue and $4 million next year.
The company was No. 20 on last year’s Business Journal list of fastest-growing private companies with $1.5 million in 12-month revenue through June 2011. That represented a threefold jump from two years earlier.
Don Nikols counts three decades of working in real estate, in both institutional and private-money lending. He has worked for Newport Beach-based companies engaged in commercial real estate lending and underwriting credit, and also has experience in building and development.
Carrie Nikols also has decades of experience in real estate lending, from small construction loans to large institutional loans.
Higher Risks
Don Nikols said being a bridge lender typically carries higher risks.
“You’re taking a piece of real estate from one position and typically improving its value in some way,” he said. “It’s not yet ready for a permanent loan, but the lender is looking at the ultimate expectation of what this thing’s going to be. And for that, you’re taking in more risk. Bridge lenders get paid more because they’re taking greater risk.”
Higher yields are helping to spur increasing investor participation, Nikols said.
“In the last six months, we’ve experienced a significant acceleration of people wanting to double or triple their investments with us,” he said. “We currently have $10 million of capital waiting to get into our next funding.”
The latest fund, which kicked off in November, was set to be a $20 million fund and is three-quarters of the way there. Nikols said he expects it to reach about $40 million.
“We’ve been around five years, and we’ve gone through some terrible times,” Nikols said. “With the crisis, it was a terrifying investment environment. Every $100,000 increment of capital into our work took a lot of work. But none of our funds has lost anyone’s money. [Investors] like getting their 8% to 10% annual returns every month.”
