W Fund goes institutional: Fund II launch slated for Fall 2007.

W Financial Mortgage Fund I, LLC, is a New York-based commercial real estate bridge and mezzanine lender which has been successfully operating a private real estate-backed mortgage and mezzanine loan fund since July 2003.

W Financial provides first mortgages, second mortgages and on a very selective basis, mezzanine loans to real estate developers and owners. The Fund's primary geographic focus is on the New York Metro area with a secondary focus on the other major markets across the U.S.

Gregg Winter, Founder and Principal, plans to launch a second fund for institutional investors in September 2007.

Fund II will be managed by Gregg Winter and David Heiden, a highly respected industry veteran with a decade of private lending experience. Winter is also the president and CEO of Winter & Company Commercial Real Estate Finance, a commercial mortgage brokerage firm that helps to source many of the loan opportunities for W Financial.

W Financial Mortgage Fund I has delivered a compound annual return net of all tees since its July 2003 inception of 10.95% on a GAAP basis. For the same period, the annualized return on the S+P 500 index was 10.31%. The typical term of a W Financial bridge or mezzanine loan is one or two years, although it has done several loans with terms as long as five years.

The high-yield bridge loan market is rapidly evolving. Experienced bridge lenders who used to syndicate individual loans among a group of high net worth investors have matured and grown their businesses. Some, like W Financial, have found that a fund structure where investors share a diverse portfolio of bridge loans is far more efficient both for the manager and for the investors. At the same time, institutional investors have started to sort out the "wheat" from the "chaff' and have begun to identify those managers who can pick the right deals, maintain tight controls and conduct both rigorous underwriting and effective loan servicing. As a result, private mortgage funds are beginning to make their way into the portfolios of more and more mainstream institutional investors. The keys to achieving the consistent yields and low volatility that are characteristic of a portfolio of real estate-backed bridge loans are:

a) a seasoned and highly disciplined management team, and,

b) a robust source of loan opportunities.

The object is to earn mid-to-high teens gross annual returns on loan opportunities with a low risk of default, and plenty of equity/value/opportunity in the event of a default. The seasoned manager knows how to value the properties correctly, vet the Sponsors, and evaluate all land use, zoning and municipal issues. On the other side of the equation, owners and developers of commercial real estate are increasingly choosing to use the appropriate tool at a given moment (i.e., bank or private financing) to accomplish the task at hand, depending, of course, upon the borrower's time frame and where a given property is in the investment or development cycle (i.e., vacant or fully cash-flowing).

The same borrower who will choose a 10-year bank or CMBS mortgage with a low, fixed rate for a stabilized, income-producing property, will at other times (usually upon acquisition or conversion from one purpose to another, such as office to residential) choose to utilize a short term, high-yield bridge loan that can close within a week or two (rather than the 2 or 3 month time frame of a typical bank loan).

The value proposition from the developer/owner's perspective goes something like this: "Private money is more expensive but far more flexible, creative and nimble."

The private lender can close within a very short time frame allowing the borrower to negotiate the deal and definitively close on the property, then add or create value, and finally refinance with a bank once the business plan has been executed. Sophisticated commercial mortgage brokers certainly understand the value of short term private mortgages. A six to twelve month private bridge loan can give the broker ample time to orchestrate and optimize the entire capital stack which may include senior debt, mezzanine debt, preferred equity or a joint venture.

This is especially true when an initial closing must occur before all building plans are completed and approvals are in place. Short term private mortgages are another tool in the real estate owner's toolbox. Depending upon the available time frame, cash flow and other factors, the borrower will reach for the appropriate tool to get the job done.

Institutional investors now are paying close attention to the asset-backed lending (ABL) space. As they gain greater familiarity with the private lending space, (and as private mortgage funds have evolved and become more and more "institutional" in their approach, due diligence and methodology), institutional investors have begun to see that a disciplined, well-run fund can produce steady returns in the area of 1% net per month, with very low volatility and very little correlation to the stock and bond markets.

In a fund with a) robust sources of new loan opportunities, b) deep market knowledge, and c) thorough and effective due diligence (on both properties and principals), private mortgage fund managers can make good use of the many inefficiencies inherent in commercial real estate.

The key for the manager of a private mortgage fund, as with any investment strategy, is maintaining discipline and focus and operating in a "target-rich environment" with ample opportunities from which to choose.

W Financial Mortgage Fund I has a two-year lock-up and a five-year investment period. Although the fund was originally created for just 20 high-net worth individuals, it has since grown to accommodate more than 90 individuals and families.

"We have decided to launch Fund II because of numerous requests from institutional investors that have said Winter. "We like what you are doing, we like your track record and we like the fact that you have no defaults or foreclosures, but we cannot live with Fund I's two-year lock-up."

While the two year lookup and five year time horizon of Fund I is clearly acceptable to the more than ninety high net worth individuals and families who are the current investors, institutional investors typically require greater liquidity.

While institutional investors like the solid collateral that underlies the loans, and like the powerful rights and remedies that a mortgage lien confers, institutional investors are not overly enamored about the fact that bridge loans are not very liquid. Institutional investors that are interested in mortgage funds should understand that although mortgages will never be absolutely liquid investments, mortgages are solid investments backed by powerful rights and remedies. As such, mortgage funds can be an excellent opportunity to diversify an investment portfolio.

The target for W Financial Mortgage Fund II is $250 million with a $1 million minimum and a 2 and 20 structure (2% management fee, a 20% incentive allocation). Fund II plans to invest alongside Fund I, paripassu, based on assets under management. Fund II will focus on the shorter term loan opportunities (two years or less), while Fund I will continue to make loans as long as five years. Fund I will remain open to continue to accommodate accredited investors with a $100,000 minimum investment.