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Hard Lending
Vestin Funds
Interview with: Michael Shustek

Author: Manish Shah
Last Update: , :
Vestin Capital has a long track record of making profitable short-term loans to commercial real-estate developers. With Vestin Funds One, Two, and the recently-launched Three, it offers shareholders the opportunity to share its success in real-estate lending.

Vestin Funds

A: Usually banks. For example, with that gentleman, who bought the racetrack in Louisiana, there Boyd Gaming, a publicly traded company, paid me off. When I did the Terribles Casino, one of the big investment banking firms paid me off. I have had New York Life pay me off, Mutual of New York, too. My projects are quality projects.

Q: So you really have to look for good quality developers or real estate entrepreneurs because many times their success or their ability to find good real estate projects minimizes some of the risk?

A: Right. You can never eliminate every ounce of risk but you sure can do everything in the world to minimize it.

Q: Now why would they go and take a one-year loan when there are other 20-year lenders out there?

A: Just the speed. For example, one time I got a $40 million loan that Merrill Lynch had on their desk for nine months and they couldnít get it done. We did it in about 11 days, and at the end of the day, Merrill Lynch was the one paying me off. The people wanted to get the project going and one year is not going to kill anybody. 38% of our borrowers are repeat borrowers.

Q: What happens when you have difficulties with your loans and it is difficult for you to collect? You start a foreclosure procedure and how long does that take?

A: In some states like Texas it is about a 60-day process. In other states it is seven months, so thatís why you have to initiate the foreclosure as soon as possible, because every month someone doesnít pay you it hurts your loan to value. The sooner the better, and this way it trains the borrowers to let them know you are not babysitting them.

Q: What percentage of properties do you end up selling?

A: Right now, there is close to $800 million under management. We own $30 million. So, I think it is a little less that 4%. There is no loss in that. It just means that it is a pain in the neck for a couple of weeks.

Q: How do you build your portfolio? Do you follow a framework or structure?

A: First, we have the NASAA guidelines, our funds meet the North American Securities Administration Act, which says the funds have to be diversified four different ways: geographically, product type, borrower, and the other thing is timing. And thatís what we do. So we canít do all our loans in San Diego, California to the same borrower on assisted living. And then we have to divide it up into five different groups on lending and on purchasing. We canít buy just mini warehouses, for instance. We have to diversify.

Q: Letís say you raise $100 million in equity in your fund and then you go out and borrow from the banks. Have you done that?

A: We never have borrowed a dime.

Q: What about Vestin Three? Is that going to be the same way?

A: We have never contemplated borrowing. We put it in our documents if an opportunity comes up, but we have never leveraged yet.

Q: So leverage is not your game?

A: At presently that is not my game.

Q: How is Vestin Three likely to be different from One and Two in terms of the philosophy or the process?

A: Vestin One and Two were just strictly lending funds. Vestin Fund Three enables us to go out and buy real estate. We see at least one deal a month that we can put $1 million or $2 million on, and Vestin One and Two never allowed us to buy real estate. So one of the things that we always have is great relationships with our banks where they take a property back and banks donít want it on their books, so they will discount it and sell it to us. Thatís a key element. Another thing it allows us to do is if thereís bankrupt properties we can make a deal and thatís also important. I believe apartment buildings are going to be key and we can partner with our borrowers and do those kinds of deals all day long. And this way Vestin Three allows the depreciation of the real estate to flow through to the investors, which is also a plus. And the other thing that is really critical is that Vestin One and Two, One was a $100 million fund and the other was a $500 million fund, they were only sold by us. With Vestin Three, we are going to allow outside brokers to sell our fund for the first time.

Q: Do you see a situation where Vestin Three owns a property but Vestin One and two loans the money to Vestin Three?

A: It cannot happen because that would be leveraging Vestin Fund Three. It is one of the guidelines of NASAA, we canít borrow. Any officer or any entity that we are related to cannot borrow from one of our other affiliates.

Q: Now what would be your advice to advisors, who are looking towards retirement money or 401(k) types of money to these funds? Is that structurally different from any of those things?

A: No, as a matter of fact we encourage that. I look at so many 401(k)s across the United States, they were destroyed the last two and a half three years. Like I saIdent, there is no such thing as the perfect investment vehicle, but this is darn close for someone who wants to preserve their capital, get appreciation in a real estate market, and also get quarterly income.

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