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

A property management overview

A key player on our team is a Property Manager (PM), who supports us from due diligence all the way until final disposition of the asset.  We take time to interview, speak to referrals and build a working relationship with our selected PM. We prefer to work with CPMs, certified by the IREM.org.

A property manager is a third party who is hired to handle the daily operations of a real estate investment.  We ensure they specialize in multifamily, are familiar with the neighborhood of our asset, and can execute on our decided business plan.

The responsibilities of a property manager will vary based on their salary and the specific terms of their management contract, but can include the following:

Responsible for Rent

Property managers are responsible for setting the initial rent level, collecting rent from tenants and adjusting the rent.

Responsible for Tenants

One of the main responsibilities of the property manager is to manage tenants. They are involved in all capacities, from finding the tenants and dealing with complaints to initiating evictions.

  • Finding Tenants/Marketing

  • Screening Tenants

  • Lease management

  • Handling Complaints/Emergencies

  • Move Outs/Rent Ready

  • Evictions

Responsible for Maintenance and Repairs

Property managers are responsible for the physical management of the property, including regular maintenance and emergency repairs within our agreed budget.  They may have in-house staff or hire 3rd-party contractors to execute the order.

Responsible for Knowledge of Landlord-Tenant Law

Although we have legal council at-the-ready to support us for landlord-tenant issues, we want to avoid these scenarios.  A good property manager has a thorough knowledge of statewide and national laws regarding the proper ways to:

  • Screen a tenant

  • Handle security deposits

  • Terminate a lease

  • Evict a tenant

  • Comply with property safety standards

Responsible for Managing the Budget/Maintaining Records

Property managers are responsible for managing the budget for the building and maintaining all pertinent records.  We look for sophisticated PM staff that utilize industry leading PM/leasing software.  Having accurate and thorough records are so critical for operators and the success of the investment.