Multi-Family Private Placements - Projections & Renovations

[Barry Dameshek]

Hello. I am considering investing in a multi-family private placement opportunity, 300+ units, $40MM+. It is a value-ad deal in which all units will be renovated along with the common area, bbq area, name rebranding, etc. Among other questions are the following:

1- Is a projected 8.7% ROI and 18% IRR (post sale in 5 yrs.) a reasonably attractive return?

2- In the event of a higher vacancy rate than projected, what should an investor's realistic expectation be with respect to the GP's adjustment to the monthly distributions? What about the reverse -- if rents turn out to be HIGHER due to a strong market? Would investors presumably benefit?

3- They are projecting renovation costs of $7500/unit. Is that reasonable?

4- If renovation cost / cap-ex turns out to be higher for some unforeseen reason, can the GP require investors to kick in additional capital? Can that occur at any time? What happens if an investor refuses or just doesn't have the liquidity available at that moment?

5- What metrics or levers are typically in place to ensure investors see larger distributions if cash flow exceeds the projections?

6- Renovations for all units are expected to take place over 24 months. If that's a reasonable timeframe, what happens to the tenants who are still on lease or have renewed? I should note that in the conference call the GP indicated leases are coming due for all tenants over the next 12-24 months.

7- Do GP projections tend to be conservative or aggressive (regardless of what they say there)? I'm sure most will say they are conservative otherwise that would be alarming to some investors. I'm curious to hear from both sides on this question.  

Thank you in advance for your input.

[Brian Adams]

@Barry Dameshek, 

1- Is a projected 8.7% ROI and 18% IRR (post sale in 5 yrs.) a reasonably attractive return? Seems reasonable

2- In the event of a higher vacancy rate than projected, what should an investor's realistic expectation be with respect to the GP's adjustment to the monthly distributions? What about the reverse -- if rents turn out to be HIGHER due to a strong market? Would investors presumably benefit? If vacancy rate and expenses run higher it will have an impact on available cash flow to distribute. Ask GP what their plan would be if cash flow distributions can't be made. Reverse is true - if rents run higher and equates to higher available cash flow, investors should benefit with a higher cash flow payment

3- They are projecting renovation costs of $7500/unit. Is that reasonable? Hard to say as it depends on scope of work. I just bought a 550+ unit deal and our upgrades are running $4500 a unit and focused primarily on interior upgrades.

4- If renovation cost / cap-ex turns out to be higher for some unforeseen reason, can the GP require investors to kick in additional capital? Can that occur at any time? What happens if an investor refuses or just doesn't have the liquidity available at that moment? The operating agreement will provide detail on what happens with future capital calls.

5- What metrics or levers are typically in place to ensure investors see larger distributions if cash flow exceeds the projections? The GP decides how, when, and amount of cash flow distributions. As a passive investor you are relying on GP to maximize rent and decrease expenses. 

6- Renovations for all units are expected to take place over 24 months. If that's a reasonable timeframe, what happens to the tenants who are still on lease or have renewed? I should note that in the conference call the GP indicated leases are coming due for all tenants over the next 12-24 months. Depends on scope of work and plan, meaning on my deals we don't renovate occupied units. We are only turning and upgrading units that are vacant.  Ask the GP what the plan is, my guess it is outlined in investment summary and/or PPM.

7- Do GP projections tend to be conservative or aggressive (regardless of what they say there)? I'm sure most will say they are conservative otherwise that would be alarming to some investors. I'm curious to hear from both sides on this question. Depends on GP and strategy. As a CPA I underwrite very conservative. Others might be more aggressive. Do your own smell test - do the numbers, return, strategy make sense? Has the GP done this before? 

Good luck on the deal