The Cottonwood Group, a private equity firm based in Los Angeles, has closed a $1 billion fund aimed at investing in distressed real estate loans and new developments. This amount is double the firm’s original target of $500 million, according to Bloomberg.
The fund focuses on what Cottonwood calls “special situations,” including projects that require restructuring. About $300 million from the fund has already been deployed, mainly through loans structured with options for Cottonwood to take over properties if borrowers default.
Cottonwood reports that the vehicle has achieved a 20 percent internal rate of return so far. The initial close for the fund occurred in 2023.
Alexander Shing, founder and chief executive officer of Cottonwood Group, described the strategy as tailored to current market conditions. He pointed out that approximately $2 trillion in commercial real estate debt will need refinancing by 2027, with nearly $600 billion identified as potentially troubled. This data comes from Newmark. Shing said higher borrowing costs and declining property values since 2022 have increased pressure on the sector.
“We’re two years into a high-rate environment and there’s a lot of stress and distress out there,” Shing said.
Investments from the fund include several markets. One notable project is a residential tower at 262 Fifth Avenue in Manhattan, where sales have stalled. In June, Cottonwood acquired Madison Realty Capital’s $90 million note secured by condo units in this building. Public records show Madison Realty had provided an additional $20 million each in mezzanine and senior debt; both were paid down in 2024. Cottonwood contributed another $50 million in mezzanine debt.
Other investments involve a mixed-use development in Austin and redevelopment of the Viper Room site, a well-known nightclub location in West Hollywood. The firm is also negotiating terms related to a $240 million construction loan it issued two years ago for St. Regis Residences in Boston.
Investors in the fund include Taiwan’s Fubon Financial Holding, Korea Investment Holdings, and North Atlantic States Carpenters Benefit Funds. Contributions came through both the main fund and separately managed accounts.
Cottonwood manages about $1.5 billion across its funds or roughly $2.65 billion when including separately managed accounts and other vehicles. Since its founding in 2012, the company has transacted or advised on approximately $7 billion worth of deals.
