ACP Real Estate Lending Fund

Overview

The Adelaide Capital Real Estate Lending Fund (the “Fund”) is a leveraged, no- load, evergreen fund that warehouses mortgage loans secured by real estate. The goal of the Fund is to provide investors with a high-yield debt instrument while minimizing the risk of principal loss through well collateralized mortgage lending activities directed at high net worth, creditworthy borrowers who lack access to more traditional financing options. The Fund is managed by Adelaide Capital Partners, LLC (“Adelaide” or the “General Partner”) led by J. Kavanaugh Tucker, Founder & CEO of Walton Funding, LLC (“Walton” or the “Company”). Walton has served as a licensed provider of residential mortgages in Florida, Georgia, Tennessee, and Alabama since its inception in 2014.

Background

Our sister company, Walton Funding, was initially established to offer boutique lending solutions to primary and secondary home buyers as well as non-owner occupied residential investors in the South Walton, (“30A”) Florida market. The Company quickly established market differentiation from regional and local banks by introducing enhanced underwriting guidelines, faster processing and closing times, and unparalleled customer service.

As Walton Funding grew, it recognized a major gap in the US consumer credit market created by the implementation of the Consumer Financial Protection Bureau’s (“CFPB”) ability-to-repay/qualified mortgage (“ATR/QM”) rule that took effect in January 2014. In theory the rule made sense as it sought to avoid a recurrence of the irresponsible lending practices that led to the Great Recession by requiring creditors to make a reasonable, good faith determination of a consumer's ability to repay any consumer credit transaction secured by a dwelling. However, once implemented ATR/QM shut out hundreds of thousands of creditworthy borrowers from qualifying for what would from now on be considered a “qualified mortgage” by levying overly restrictive underwriting requirements.

The CFPB mandate determined that only qualified mortgages could maintain eligibility for sale on the secondary market through traditional outlets such as Fannie Mae and Freddie Mac. Borrowers whose financial situations clearly demonstrated the ability to repay but did not meet one of the complex, and oft arbitrary, array of requirements were left with limited options. These non-qualified and non-agency (“Non-QM”) borrowers were either faced with the realization of not being able to purchase a home, were forced to buy with all cash or had to turn to financial institutions who were large enough to hold these notes on their books for the full amortization period.

Opportunity

There is a significant demand for this type of mortgage lending in the marketplace, and it’s poised for explosive growth in the coming years. In 2019, over $4 billion in Non-QM loan volume original and completed multiple securitizations, demonstrating an increasing investor demand for these types of loans. Furthermore, all securitizations received AAA ratings from both Fitch and DBRS, a strong statement as to the relevant risk profile.

Walton Funding has combined its exceptional sales and marketing approach with its streamlined operations to capitalize on the prevalence of these higher rate, lower leverage lending opportunities and facilitate its growth. The Company has also remained profitable since its inception, generating revenue from three primary sources: per annum interest, loan fees and gain on sale revenue. However, the company has received nominal per annum interest due to the short holding times (3-21 days) for loans driven by the substantial cost of funds from warehouse lines. It has also lacked access to the higher premiums offered by some of the larger loan aggregators who purchase loans on a portfolio basis.

The opportunity presented by Adelaide through the Fund combines investor capital with traditional bank credit lines to reduce the average cost of capital on loans held for sale and in turn increase its realized per annum interest. Additionally, hedge funds and other large institutional buyers subject lenders to minimum net worth requirements. The Fund will allow access to these counterparties which will equate to a 50bps – 100bps price increase on gain on sale revenue. Walton Funding intends to originate $150 million in total loans over the course of the next twelve months. Adelaide will select specific loans that adhere to Fund guidelines for capitalization by the Fund through Walton Funding as well as other similar residential and commercial loan originators, and investor returns will be generated from a combination of per annum interest and gain on sale revenue.

Fund Specifics

Adelaide is raising capital through the issuance of membership interests in the Fund with a minimum investment of $100,000, or such lesser amount as accepted by the General Partners and has already made a commitment to the Fund of $1 million.

The Fund offers a preferred return of 7%, though it is targeting an annual net rate of return of at least 10% through an additional 50% equity participation for investors, neither of which can be guaranteed. That return will be comprised of two components:

  • Rate spread between the per annum interest of loans held in the portfolio and the weighted average cost of capital derived from the investor capital and traditional bank credit lines.

  • Gain on sale revenue generated through portfolio sales to loan aggregators and other note buyers.

Investors will receive quarterly cash distributions in accordance with the Fund’s Limited Partnership Agreement (the “Limited Partnership Agreement”).

Please see the Limited Partnership Agreement and subscription document for full details. In the event of a conflict between the terms of this document and the terms of the Limited Partnership Agreement, the terms of the Limited Partnership Agreement shall prevail.