Bobby Khorshidi’s introduction to real estate finance came from his seven-year stint as a loan officer for Wells Fargo. Later in his career, he began purchasing non-performing commercial loans, where he became adept at determining, as he put it: “what makes a bad loan.”

With a drive to become a more active player in the space, Khorshidi stepped out on his own. He first founded Partners Capital Inc. in 2009, which acquires and manages value-add, small bay, multitenant, industrial properties. Further down the road, he wanted more.

“We know how to operate real estate, we know how to work out real estate loans and we know the process of borrowing. So, why don’t we dip our toes into financing commercial real estate?” Khorshidi said he recalled asking himself in 2016.

Thus, his quandary served as the genesis of Archway Capital, a Century City-based short-term lender geared toward middle-market real estate sponsors. Since its founding, Archway’s funds have originated close to $550 million in deals and has maintained zero capital losses. 

Most recently, the firm launched its second opportunity fund with a target raise of $100 million by the end of 2026 and a goal of producing 11% to 15% returns.

The fund will focus on multifamily, retail, industrial, office and mixed-use assets through a variety of debt investments.

Khorshidi, Archway’s chief executive, said he believes it is perfect timing for a fund like this given the current state of the market.

“We feel comfortable going higher in the capital stack, lending more money, higher loan-to-values because we’re starting to see some turnover and that price discovery (as well as) new bases,” Khorshidi said. “This is a close-ended fund with a limited investment horizon and a liquidation period in what I would say is a new credit cycle, which I think is arguably the best time to be in debt.”

For those looking to purchase value-add commercial real estate right now, Khorshidi said financing is limited – a gap Archway is eager to fill.

Current market

Because of the present market, which Khorshidi called “volatile and fragmented,” he finds operating in the private lending space to be lucrative as it is currently deemed safer.

Shlomi Ronen, managing principal at Century City real estate investment firm Dekel Capital, shared a similar view.

“(By being in the private lending space), you’re getting a very attractive risk-adjusted return, not taking any sort of equity risk while the market is figuring its way out,” Ronen said.

Additionally, Khorshidi sees an opportunity for those looking to mitigate issues created by the high-interest rate environment.

Many borrowers who took on high-leverage financing banked on lower interest rates to refinance and pay off their loans. With interest rates still high, they are currently left with the need to come up with more cash or sell their projects.

This creates space for real estate buyers, firms who purchase loans and groups looking to take over properties if the owners default, Khorshidi said.

“The bailout that everyone was hoping for… we’re not seeing it happen,” Khorshidi said. “… If you’re a real estate investor, you’re going to see a ton of opportunities for deals that are going to have to trade hands.”

Ronen also pointed to the issues borrowers are facing who took on debt “very cheaply and very aggressively both on a loan-to-cost and loan-to-value standpoint.”

“The challenge is that (borrowers) are not hitting pro forma because of softness in rents in many markets and operating expenses going up. Then, you combine that with long-term rates going up and driving cap rate expansion over the last three years,” he said. “Their equity ends up being impaired and they’re having to come in with fresh equity in order to pay off their existing debt.”

While some consider selling and cutting their losses, Ronen said many are opting to restructure their debt and seek extensions. 

Evaluating deals

Archway operates in the short-term lending space, but an important aspect of its loans are earnouts, where additional capital can be deployed if certain agreed upon changes or progress markers are met, such as improvements or renovations.

“Every time we make a draw, we want to make sure that we are still good from a loan-to-value perspective – that by making that draw to you we are actually making our position safer because we’re increasing the value of the property,” Khorshidi said. “That’s an important element of what we do.”

Khorshidi also stressed the importance of the evaluation process for its sponsors’ business plans, considering feasibility, the current state of supply and demand, cash flow, the quality of the real estate and using market studies and data to drive decisions.

The firm also never takes on a project it can’t bounce back from if things don’t go as planned. 

“Every deal we make, we really view it as an investment even though it’s a loan,” Khorshidi said. “And so, we want to have all the data available to us, so that if we have to take over the real estate, we’re in a position to do so.”

That said, Khorshidi stressed that the goal is never to get to that point. Defaults in Archway’s tenure have been minimal, he added.

As for what the perfect project for Archway looks like, Khorshidi described lending to a sponsor executing a value-add to a 100-unit multifamily apartment building. This sponsor would outline a clear path toward increasing rent upon completing their business plan and would have already completed five similar transactions successfully to show Khorshidi that they are an expert in the specific market. Upon completion of the project, the sponsor would refinance.

Competition landscape

Archway operates in the $3 million to $30 million range with a sweet spot of around $10 million. Khorshidi referred to this space as “small balance commercial lending/lower-middle market lending.”

As for who is competing in this space, Ronen said it’s a combination of small banks, debt funds, private lenders and some insurance companies on the smaller bridge loans. 

While Archway tends to be a bit more expensive than banks, Khorshidi said the firm’s narrow focus and expertise make it worth the price tag.

To attract borrowers while charging higher premiums than competitors, firms need a strong track record on a number of factors, according to Ronen.

“It’s a combination of higher proceeds, speed of execution, willingness to lend on product and property types that banks aren’t and, lastly, nonrecourse,” he said.

Khorshidi cited Archway’s leverage percentage as a leg up on competitors, stating that the company operates with more equity and less debt than others in the industry.

Archway’s focus on short-term financing also puts the firm in a good position with liquidity.

There’s more liquidity in the short-term bridge loans in the $10 million to $20 million range and plenty in the $20 million and up space, Ronen said.

“There’s always some risk, but you’re generally well positioned within the overall capitalization (in short-term financing) to be in a position that even if the sponsor does not execute on the business plan, there’s still a tremendous amount of both equity and value ahead of you, especially in today’s market cycle where lenders are underwriting more conservatively,” Ronen said.

Khorshidi also finds value in the short-term space with regard to changing economic cycles.

“One of the advantages of being in the bridge space is our exposure is very limited to the markets… We’re in and out quick enough that we don’t experience the credit cycle,” he said.