We’re excited to share that Nectar Fund 2 is now open to accredited investors on a limited basis.
To kick off the fund, Nectar Co-Founders Derrick Barker and Brittany Mosely joined Nectar’s Head of Capital Markets Andres Sandate to walk through the details of this first-of-its-kind fund and answer investor questions.
If you’re interested in learning more about Nectar’s real estate cashflow marketplace and the opportunity to invest in Nectar Fund 2, here’s an overview of some of the most frequently asked questions we’ve received from investors since launching the fund.
Nectar’s Portfolio
Are short-term rentals a strong investment in today’s market?
Even as traditional real estate transaction volume is slowing down, demand in the short-term rental market is continuing to increase.
At the same time, lenders are decreasing the amount of leverage they’re offering and interest rates are rising. This means that even though there’s demand for new short-term rental units, entrepreneurs are finding it more challenging to access capital. This creates a unique opportunity for Nectar to fill the gap between institutional lending and the entrepreneur’s out-of-pocket contributions.
Why does Nectar focus on short-term rentals?
While the Nectar model could work for any cash flowing asset, we’ve chosen the short-term rental market because there is a major need for capital, and the strongest operators want to expand.
Most institutional lenders and traditional financing sources simply do not understand the unique revenue and P&L dynamics of short-term rentals. They are constrained by bank regulations, don't have relationships with the strongest operators and haven't invested the time to understand the short-term rental market.
Even though it’s severely capital constrained and operationally complex, the space is growing rapidly. Seasoned operators run well managed, highly profitable operations, yet are unable to secure expansion capital from traditional sources.
How does Nectar construct its portfolio to minimize risk?
While there are several ways we work to minimize risk — including detailed underwriting, a highly selective process for approving an advance, and our commitment to working with the highest caliber of entrepreneurs we can find — our first line of defense is always diversification. We intentionally construct portfolios with the objective of achieving balanced to higher returns with lower volatility. We seek to gain and then manage exposure actively to any single geographic region (primary, secondary, tertiary, rural, etc.), type of rental (beach, mountain, ski cabins, corporate stays, urban oasis, etc.), duration of advance, credit profile of operator, and much more.
What data does Nectar use to evaluate the short-term rental market?
Nectar's main source of data is primary data collected in real time from hundreds of the top operators in the county who seek advances and apply for funding. Additionally, we maintain relationships with firms like AirDNA and others who augment our primary data efforts with raw data on the short-term rental industry going back many years.
Nectar’s Underwriting Process
How does Nectar evaluate and score operators?
Nectar differs from other real estate investments, because rather than underwriting a specific deal or property, we underwrite the operator’s existing cashflow.
To do this, we examine a variety of data, including:
- 2 years of profit and loss statements
- Balance sheets
- Bank statements
- Equity value of the entire portfolio
- Credit and background checks
In general, we prioritize understanding the entrepreneur’s coverage ratio, leverage, and revenue trend of their portfolio in the market.
How does Nectar’s underwriting incorporate regulatory risk management?
Nectar avoids markets where there is regulatory uncertainty or ambiguity. Operators must possess permits, licenses and have a history of adhering to local regulations and laws governing the short-term rental industry in order to be approved for an advance with Nectar. We work with the most successful operators who have been regulated for many years and are familiar and accustomed to regulations, which reduces the regulatory risk for Nectar Fund 2.
Investing with Nectar
How will my investment be deployed?
When you elect to invest in Nectar Fund 2, and upon admittance to the offering, your funds will go into a holding account with SouthState Bank. Per the PPM, Nectar then has 60 days to deploy the capital into advances. If the capital is not deployed within 60 days, Nectar is obligated to give you the option on day 60 to redeem the remaining funds. We don't anticipate this happening based on our current pipeline of entrepreneurs.
How much capital is Nectar contributing to Fund 2?
Nectar has committed approximately $2 million of capital toward advances since inception from its own balance sheet and that of its founders.
What protections are in place for investors?
We’ve intentionally created this fund to include multiple layers of protection for investors:
- Our portfolio is diversified to include a wide range of geographic locations, term lengths, and market types.
- We over-collateralize so that the maximum advance we make can be repaid with 65% of the operator’s current cashflow.
- We require every operator to maintain a 3-6 month cashflow reserve at minimum at all times.
- The underlying equity of the operator’s portfolio provides an additional layer of protection in the event that the property needs to be sold.
- The maximum LTV (debt + Nectar advance) we will underwrite is 85%.
In order for investors quarterly distributions to be impacted, the entire portfolio of operators receiving advances would need to experience a sustained downturn of 35% or greater in net cash flows, the operator would have to utilize their entire 3-6 months of cash reserves, their properties would have to decline by greater than Nectar's underwritten value, and the operator would have to have no additional sources of repayment on their balance sheet.
Additionally, the operator would have to have no other properties that Nectar could swap for underperforming properties and the new manager Nectar installed to turn around the underperforming property would have to also underperform and not make the minimum budgeted payment.
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