Hudson ventures into no fund's land.

In 2003, when Hudson Realty Capital LLC founders Sanford Herrick, Richard Ortiz and David Loo first saw a gap in the high-yield loan market for clients looking to take advantage of the under $25 million level, they seized the opportunity. Their goal was to become a dominant player in this niche.

Today, that goal has become reality. In the last two years, HRC has grown from a start-up enterprise to an established market entity, closing more than $350 million in commercial transactions that range between $2 million and $20 million.

Initially, HRC sponsored two high-yield real estate funds, the Hudson Debt Fund I LLC, which makes high-yield bridge and mezzanine loans, and the Hudson Opportunity Fund I LLC, which invests in real estate directly and acquires under performing mortgages on a leveraged basis.

"Billions of dollars of opportunity funds chase the larger transactions, leaving a gap in the market for an entity like HRC to meet the financing needs of borrowers at the $25 million level," explained Spencer Garfield, Hudson's managing director.

Building on this momentum, HRC will introduce its third real estate fund in 2005, which will conduct both debt and equity activities. The new fund will be larger than both of its previous funds combined.

As a non-traditional capital source, HRC focuses on "special situation" transactions, including distressed debt purchases, assets that require turnarounds or changes of use, assets with lease-up risk, asset types and/or assets in geographical locations that have been depressed. HRC's investment strategy is diverse, with the majority of funds invested in high-growth residential markets with high barriers to entry.

However, HRC has also invested in office properties (23.1%), mixed-use (10.4%), retail (9.4%), multi-family (7.9%) and specialty property types (6%). Hudson is willing to structure transactions in a variety of different ways in order to achieve appropriate risk adjusted returns.

While the anticipated rise in interest rates and high property valuations have caused conventional lenders to tighten their lending criteria, firms like HRC are presented with increased opportunities to deploy capital, although not without meeting their own strict lending criteria.

HRC considers several factors when examining a client: Are they an experienced sponsor with a successful track record of involvement in that specific asset type? Is this a geographically well-located property? Is there a viable business plan? Has a sound exit strategy been explored?

The exacting lending criteria are important, but HRC considers itself a "story investor." Cofounder and managing director Sanford Herrick explains, "HRC does not typically invest in simple transactions. Our borrowers come to us with a complex transaction or a history that requires us to understand, evaluate outside the box, problem solve and then execute. We offer our clients rapid turnaround and surety of execution, particularly on complex value-added transactions. This core capability is at the heart of HRC's success, enabling our borrowers to capitalize on a variety of real estate opportunities."

The most sought-after investments for the Hudson Debt Fund I LLC include first mortgages and mezzanine financing. On the equity side, Hudson continues to team up with experienced mid-size developers and operators who have identified a good value-added transaction and are looking for an equity partner.

Some of HRC's deal highlights for 2004 included $20.25 million in mezzanine financing for three transactions involving multi-family acquisitions and conversions to condominiums in Southern Florida; an $18 million first mortgage bridge loan to position a Manhattan property for sale as a 190,000 s/f development parcel; and $19.5 million for a first mortgage for the development of 576 acres of residentially zoned land in Tennessee.

"From the beginning, our objective was to create and manage a diversified portfolio of loans and real estate, while generating high, risk-adjusted returns for our investors," said co-founder and managing director David Loo. "So far, we have exceeded our initial expectations and look forward to furthering our valued partner and industry relationships."