The developer of one of the priciest projects in the country has a request for its condo buyers. Lend us money. Buyers at One Beverly Hills are doing it, through something Cain calls Founder Bonds. The bonds pay 5%. On Tuesday, Oct. 13, the 10-year Treasury closed at 5.216%. So people buying $15 million condos are earning less than the government pays, and taking far more risk to do it.
Cain is an investment firm based in London. Its $10 billion project covers 17.5 acres and is due in 2029, the Journal's Nicholas G. Miller reports. Aman, the hotel operator, will run the roughly 150 condos. Nobody is forced to buy a bond. Every buyer so far has said yes, typically for about 30% of the purchase price. Cain has raised about $350 million this way and wants more than $1.6 billion.
Here's where the money stands in line. Ahead of the bondholders sit a $2.8 billion senior loan led by JPMorgan (JPM) and a $1.5 billion loan from VICI Properties (VICI). That's more than $4 billion with first claim on the project. If the towers never get finished, a buyer could be out both the penthouse and the money lent to build it. David Reiss, a Cornell Law professor who studies real-estate finance, told the Journal the buyers are “getting paid a small amount to take a large amount of risk.”
The deposit rule it steps around
California normally lets a developer keep a deposit of no more than 3% of the price, and that money can't go into construction. The rule doesn't cover Founder Bonds, so Cain can put bond money to work on the site. People familiar with the deal say Cain has the funds to finish without the bonds. The bond money replaces some of Cain's own equity.
The market around it is soft. L.A. condo sales through August were the lowest in Redfin's records, which go back to 2012. Backers say the top end is different. Recent sales at One Beverly Hills topped $7,000 a square foot, above the county record set earlier this year. More than $1 billion is under contract or reserved. “Beverly Hills is its own animal,” a Northern Trust wealth adviser told the paper. The bond math doesn't change.
Our read
This is Fixed Income (IN02). Strip away the gardens and it's a loan. Three questions decide any loan. What does it pay, who gets paid before you, and can you get out. Here the answers are 5%, more than $4 billion of other lenders, and no. A 10-year Treasury pays more, has the government behind it, and sells in a minute. Bills pay less, about 4%, with the same credit and the same exit. That's why the desk keeps safe money in bills and floating-rate paper, SGOV in 49 books and USFR in 14. JPMorgan is held at weight in 26 books and VICI in 4; nothing added. The verdict is Avoid, and it's for the structure. Lending junior money to a single project for less than a Treasury pays is a reach for nothing.
The piece of your plan this touches is any private note you've been offered or already hold. Write down what the note pays. Next to it, write what your Treasury bills or money fund pay right now, and remember the 10-year closed at 5.216% on Tuesday, Oct. 13. Then write who gets paid ahead of you if the project stalls. If the private note pays less than the Treasury and sits further back in line, the deal was built for the borrower. You don't wait for the roof to leak to read the warranty.