FAQ- what does non-recourse mean?

Non-recourse debt is peace of mind and security for borrowers. With non-recourse debt, the loan in question is secured by the property alone and there is no personal liability.  For example, if the borrower defaults on the loan, the lender cannot obtain any further compensation from the borrower beyond the seizure of the property, even if the property collateral does not cover the full value of the defaulted amount.

 

FAQ - What is an Asset Class?

As you may know, there are many types of commercial property, for example Industrial, Office, Hospitality and Retail.  With our focus on the Multifamily type, I will describe the typical identifiers of its several classifications. 

Class A Multifamily

  • Generally, garden product built within the last 10 years
  • Generally the highest valuations, cost/door and the lowest Cap Rates
  • Bought for the appreciation
  • High-rise product in select Central Business District may be over 20 years old
  • Commands highest rents in the submarket and is predominantly white-collar
  • Well merchandised with landscaping, attractive rental office and/or club building
  • High-end exterior and interior amenities as dictated by other Class “A” products in the market
  • High quality construction with highest quality materials

Class B Multifamily

  • Generally, product built within the last 20-25 years
  • Bought for some appreciation and cash flow
  • Mixed tenant base of white and blue-collar
  • Cap Rate is higher than Class A and lower than Class C
  • Exterior and interior amenity package is dated and less than what is offered by properties in the high end of the market
  • Good quality construction with little deferred maintenance
  • Commands rents within the range of Class “B” rents in the submarket

Class C Multifamily

  • Generally, product built within the last 30-40 years
  • Best cash-flowing asset class
  • Below market rents with low to moderate income tenants
  • Limited, dated exterior and interior amenity package
  • Improvements show some age and deferred maintenance
  • Commands rents below Class “B” rents in submarket
  • Majority of appliances are “original"

Class D Multifamily

  • Generally, product over 40 years old, worn properties, operationally more transient, situated in fringe or mediocre locations
  • Larger % of Section 8 and government-subsidized tenants 
  • Shorter remaining economic lives for the system components
  • No amenity package offered
  • Higher vacancies
  • Marginal construction quality and condition
  • Lower side of the market unit rent range, coupled with intensive use of the property (turnover and density of use) combine to constrain budget for operations

FAQ - What is a Private Placement?

 

The Private Placement Memorandum (PPM) is required by the SEC and is a lengthy legal document (typically over 100 pages).  We rely on proven SEC attorneys (see our Partners) to scribe these materials for us, which is certainly costly, but ensures we are following all laws.

The PPM describes the offering and the risks involved.  It will include a partnership/operating agreement, investment summary and Subscription Agreement (SA).  It is SA that includes basic information as to the number of units and amounts being purchased, the investor questionnaire, and it's the form investors will review, sign and submit to confirm their participation in the deal.  

Although there are many styles of offering, we prefer a "specified" offering so our investors know exactly where their money is being used.  In addition, our offerings follow the Regulation D set of exemptions outlined by the SEC.

 

FAQ - What is a Syndication?

 

In its simplest form, syndication is the pooling of money by multiple people for a common goal.  I once heard it compared to buying an airline ticket, which I think is a great example. 

For our context, our common goal is to invest in real estate for a return, and the group of people are made up of Limited Partners (LP) and General Partners (GP).

  • What is a Limited Partner? A passive investor in the deal. They have limited liability. Their risk is limited to the amount they invest in the deal, no more. Their other assets are protected. They cannot be sued, they are not on the loan and are not responsible for the active performance of the property.

  • The active role in the deal is the GP, or deal sponsor. The GP is active well in advance of including the LP side and sometimes is made up of multiple experts that put the deal together (e.g. identify the market and asset, underwrite, contract, entity creation etc). The sponsor manages the strategic business plan as well as the local management team. You will hear GP, Syndicator and Sponsor often used interchangeably.

 

 

FAQ - What is a Cap Rate?

The capitalization rate, or cap, of an investment may be calculated by dividing the investment’s net operating income (NOI) by the current market value of the property (where NOI is the annual income on the property minus all operating expenses, which excludes the debt service).  

Essentially it calculates your rate of return (%) if you paid all cash for the asset.  It's most commonly used by lenders, brokers, and owner/operators to calculate the valuation of an asset.  Below I outline an example where we look at an asset's value today, compared to a future projection.  This is a key element in building a business plan for a property and why multifamily is so exciting.  We can work to raise the NOI, which directly forces appreciation because of it's relationship to value.

Note that caps vary by location and also by asset type and class (e.g. class A assets will have lower caps than B and C).  The capitalization rate is a popular and easy ratio to use, but it is not the sole factor in a real estate investment decision.

Another interesting way cap rates can be helpful is when they form a trend.  If we're looking at cap rate trends over the past few years in a particular sub-market, then the trend can give us an indication of where that market is headed.  For instance, if cap rates are compressing and trending downwards (which most markets are today), that means values are being bid up and a market is heating up.  We might see confirmation of this in research reports that identify the MSA is in an emerging phase of the market cycle, called "recovery" which is followed by "expansion".

The formula:

The formula for calculating the capitalization rate can be expressed in the following ways:

Capitalization Rate = NOI / Current Market Value

or 

Current Market Value = NOI / Capitalization Rate

A current valuation example at an 8 cap:

$2,000,000 = $160,000 / .08

A projected valuation example at the same 8 cap:

Note that the NOI below reflects a small $50 rent raise to a 60 unit multifamily deal

$2,450,000 = $196,000 / .08