Multifamily and Mixed-Use Real Estate

Why multifamily and mixed-use properties serve as collateral

Real estate can serve as loan collateral because it is a tangible asset whose value can be estimated through appraisal and whose ownership can be secured through a recorded deed of trust. Evoque Fund invests primarily in first- and second-position private-money loans, also called trust deeds, that are secured by mixed-use and multifamily real estate. In that structure, the property stands behind the borrower's obligation, and the lender holds a recorded interest in it.

Two features make these property types common choices for private-money lending. First, they tend to generate rental income, which can support a borrower's ability to service a loan. Second, they are widely understood asset classes with established methods for estimating value, which is central to how a lender sizes a loan against collateral. Neither feature removes risk, and the value of any property can decline.

• A first-position trust deed generally holds the senior, priority claim against the property.
• A second-position trust deed sits behind the first and carries additional risk, because a more senior lender would be repaid first in a default or sale.

Understanding multifamily real estate

Multifamily real estate refers to residential buildings that contain multiple rental units, from smaller multi-unit properties to larger apartment communities. Demand for rental housing tends to be shaped by persistent factors such as population, household formation, local employment, and the relative cost of owning versus renting a home. In markets where new supply is constrained, demand for existing rental housing can be more durable, though this varies widely by location and over time.

A defining characteristic of multifamily property is that income is spread across many tenants rather than concentrated in one. When a single unit becomes vacant, it represents a smaller share of total potential income than the loss of a sole tenant would in a single-tenant building. That diversification can make cash flow steadier in qualitative terms, but it does not eliminate vacancy, and multifamily properties carry ongoing operating costs and management demands that can be significant.

Multifamily is still cyclical. Rental income and property values can be affected by economic downturns, rising interest rates, weakening local employment, oversupply from new construction, and regulatory factors such as rent regulation or changes in property tax treatment. These forces can move a property's value and its income in the same direction at the same time.

Understanding mixed-use real estate

Mixed-use real estate combines residential space with commercial space, such as ground-floor retail or office beneath apartments, within a single property or connected development. These properties are often found in walkable, urban corridors where a blend of uses suits the location. By combining uses, a mixed-use property can draw on more than one source of tenant demand and diversify its income streams.

That blend also adds complexity. Commercial tenancy behaves differently from residential tenancy. Commercial leases, tenant creditworthiness, and demand for retail or office space respond to their own cycles and can be more sensitive to economic conditions than housing. A mixed-use property therefore carries the risks of both components, and evaluating it as collateral requires understanding each part on its own terms.

How these property types fit Evoque Fund's lending approach

The Fund's loans are secured by deeds of trust recorded against multifamily and mixed-use collateral. The approach is intended to rely on protective equity, which is the cushion between the outstanding loan balance and the estimated value of the underlying real estate. The general idea is that when a loan is modest relative to the property's value, that cushion can provide a margin that may help absorb a decline in value or support recovery if a borrower defaults. Protective equity is a concept, not a promise. It can narrow or disappear if property values fall, and it does not guarantee repayment.

Because these are private loans rather than publicly traded instruments, a great deal depends on how each loan is underwritten, how collateral value is estimated, and how the loan is serviced and monitored over its life. Property values are estimates that can prove inaccurate, and conditions that supported a value at origination can change. Investors in the Notes rely on the manager to perform these functions.

Who the Notes are offered to

Evoque Fund offers promissory notes through a private placement under Regulation D, and the Notes are offered only to accredited investors. The offering commenced on July 7, 2023. The Notes are not registered under the Securities Act of 1933 and are sold in reliance on an exemption from registration, and a Form D is on file with the SEC. The Notes are private instruments with no public trading market.

To learn more about how the Fund lends against multifamily and mixed-use collateral, you can request the offering overview through the contact form.

Risks and limitations

Investing in private real estate debt involves substantial risk, including the possible loss of the amount invested. Consider at least the following before requesting information:

• Borrower default: A borrower may fail to make payments or to repay principal at maturity. Recovering value from the collateral can take time, may involve legal proceedings such as foreclosure, and can yield less than the outstanding loan balance.
• Collateral value declines: Multifamily and mixed-use property values can fall due to economic cycles, rising interest rates, weakening local employment, or oversupply. A decline can erode protective equity and reduce the amount recovered in a default.
• Commercial exposure in mixed-use: The commercial portion of a mixed-use property, such as retail or office space, can face different and at times sharper cycles than housing, including tenant vacancy and shifting demand, which adds risk to that collateral.
• Illiquidity and no public market: The Notes are private and have no public trading market. An investor may be unable to sell or exit when they wish, and liquidity or redemption terms may be limited.
• Reliance on the manager: Outcomes depend heavily on the manager's underwriting, valuation, servicing, and monitoring. Misjudgments, errors, or changed conditions can affect results.
• Past conditions do not predict the future: The general characteristics of these property types, and any prior market conditions, do not predict future performance, and actual results can differ materially.

Frequently Asked Questions

Why does Evoque Fund lend against multifamily and mixed-use real estate?

These property types are tangible assets that can be appraised and secured with a recorded deed of trust, and they typically generate rental income that can support a borrower's ability to service a loan. That said, their values can decline and lending against them carries risk.

What is protective equity?

Protective equity is the cushion between a loan's outstanding balance and the estimated value of the property securing it. A larger cushion may help absorb a decline in value or support recovery in a default, but it is a concept rather than a guarantee and can narrow or disappear if values fall.

Who can invest in the Notes?

The Notes are offered only to accredited investors through a private placement under Regulation D. They are not registered under the Securities Act of 1933 and have no public trading market.

Continue learning

The Insights below explore multifamily and mixed-use real estate, private lending, and related market dynamics in greater depth.

Important information

For accredited investors only. Evoque Fund, LLC offers promissory notes through a private placement under Regulation D. The Notes are offered only to investors who qualify as “accredited” under applicable SEC rules. Nothing on this page is an offer to sell or a solicitation of an offer to buy any security; any offer is made solely through the Fund’s confidential offering documents.

This page is educational and is not investment, legal, or tax advice. It does not describe specific returns, fees, or terms. The SEC has not approved or endorsed this offering. Requesting information does not create an investment account, reserve or accept you into the offering, confirm your accredited status, or obligate you or the Fund in any way. Review the Fund’s SEC Form D and offering documents, and consult your own advisors, before making any investment decision.