All Forum Posts by: Kat N.

@Cody L. Great success story, respect all the hardwork. I flipped SFH and I knew how hard it is.

Yes, agree. Interestingly the sponsor structure the deal high on asset management, and no carry interest (which based on this structure, LPs and sponsor interest are not 100% aligned). I am going to ask how much capital the sponsor is going to put into the deal.  

Thanks @Shehzad S. . Yeah I recieved the pro-forma and working through the details / assumptions of the financial modal. Vetting syndication deal & sponsor is a skill. 

@Cody L. I was laughing hard at the “it’s a dog with covid”. I bet everyone here to learn, so it will be helpful if you can shed some lights why this deal is bad to you. 

1. - Cap rate at 1.7% which means the acquisition price is too high (though people do not look at cap rate that much because it is a destressed deal). The property is beaten up, lack of essential services & utility, online review is bad, current NOI is low, it means the price is too high.
2. - Aggressive assumption of rent increase (which was claimed 10% lower market today) and agressive assumption about cost reduction --> these assumptions are be validated / unvalidated quickly by looking at comparables and nearby multi family.
3. - Deferred maintenance - given than it is a distressed deal, there are hidden cost to run this property, espeically the old chiller system. I had not researched and/or asked the sponsor enough about the deferred maintennce, and not sure if $800K is enough of the reserve and capital improvement. 
4. - Aggressive assumption how fast to turn around the property in one year. I am sure there are bad tenants there, and also bad online reviews. So fixing up the property, recruit good tenants and let go bad tenants, building back onlinr reputation would take more time than just one year. 

Let me know which reasons reasonate most to you?

@Nick B. I see, thanks. I will look for these due diligence singals that you point out. In the sponsor reports "Current rent is about 10% below market, creating opportunity for rent increases once units have been upgraded". 

Just "that the NOI = $111K today and forecast to improve to $496K in a year" is too good to be true for me. But I will dig into this more.

@Nick B. Thank you so much for your insights. Great point on the utility inclusion vs exclusion, I will check the norm in Houston. 

There are 104 units, and the yearly potential rent = $1.1M (not yet net out vacancy). Do you think $145K payroll is enough? 

@Cody L. I will private message you. 

@Bernadeau C. IRR = 19% (base case), 3.7x return.

I think the biggest assumption is (a) 3 year cash out refinance, and (b) NOI increased from $111K to $496K in year one. After that, Long-term assumption is fine (e.g rent incease 2-3% and cost increase per year) and the IRR = 19% and 3.7x return will follow that financial model. That is why I focus on the refinance assumption and NOI assumption.

For improvements: in the report, it seems like the property is in pretty bad shape of essential services (trash, HVAC systems, locks, pools, gas, water, electric, old chiller systems). Down the road, there is other rehab but it does not seem to be the key improvemments. Given that the property is in distressed state, now I think there may be hidden deferred maintenance, and not sure if Capital Improvement/Reserve $ 800K is enough to do the job. 

@Bernadeau C. @Nick B. @Account Closed 

For Refinance: the sponsor secure the loan at 4% today, look to improve NOI in year 1, and refinance in year 3. Just for my knowledge, because we need 2 years of history, thus we can only refinance in year 3 vs. immediately in year 1? To bake in a less aggressive model, I am thinking to change to year 5 refinance, and rate = 5%. Does it seem reasonable?

Let me post the Assumptions provided by the Sponsor, and would love to hear your insights and poking holes :) 

1. Acquisiton and reserve seem fine. Total Costs $ 7.5M, Loan = $5.2M at 4%, Equity = $2.3M

• Purchase Price $6.5M
  Capital Improvement/Reserve $ 800K
  Legal & 3rd Party Reports $ 25K
  Lender Fees & Closing Costs $ 78K
  Broker Fees $ 52K
  Acquisition Fee $ 65K

2. Current NOI = 111K

• Potential gross rent = 1.1M, minus 10% vacancy & other cost, Net rent = 890K
• Other income = $42K
• --------
• Real Estate Taxes 108K
• Insurance 82K
• Property Management 50K
• General & Administrative 20K
• Marketing 1K
• Payroll and Payroll Taxes 210K
• Repairs and Maintenance 77K
• Contract Services 26K
• Electricity 77K
• Utilities Water 124K
• Utilities Gas 15K

3. Projected NOI = $493K, primary through 3% lower vacancy, income from Utility because the current rent is inclusive of utilities and the Sponsor do not want to include Utility in the new terms, and reduced operating expenses

• Potential gross rent = 1.1M, minus 7% vacancy & other cost, Net rent = $970K (80K increase)
• Other income = $42K
• Add income from water reimbursement and electricity: $134K ($134K increase)
• --------
• Real Estate Taxes 108K
• Insurance 42K (40K cost decrease)
• Property Management + Asset management 45K
• General & Administrative 15K
• Marketing 10K
• Payroll and Payroll Taxes 145K (65K cost decrease)
• Repairs and Maintenance 46K
• Contract Services 47K
• Electricity 77K
• Utilities Water 64K (60K cost decrease)
• Utilities Gas 15K

I found the Sponsor through a very close friend a mine, she works in PE industry and she is very well analytical and she invests. She also works on the Finance side of other deals of the same sponsor and she said other deals worked as expected.

Hello all, I am reviewing a syndication opportunity where the sponsor strategy is to improve the operations & rent of the current apartment, and cashout refinance in year 3. 

1. The sponsor assumption is to cash out refinance with 30 year loan in year 3, at 4% interest at 75% LTV. I am not familiar with commercial loan. Can someone advise me if this assumption is inline with the market?

2. The current NOI = $111K, and the sponsor is buying at the price $6.5M, so the cap rate is really just about 1.7% ?!?. The sponsor said there are some improvement can be done, and a lot of costs can be reduced, thus, the sponsor is looking to increase NOI to $475K, and cap rate at 6%, thus the value after improvement = $7.9M. (Note this is class C building in Houston, in which cap rate is 6% typically). I am concerned of the acquisition cap rate. Is that typical?

Thanks so much for all insights and advice, 

Kathy

I see. Thank you very much everyone for your reply! 

@David M.: Great point, I will find an umbrella insurance. 

@Jeff Copeland Thank you very much. PM you! 

Great insights, a couple of follow-up questions so anyone reading the thread can get benefits too:

1a. Great info on the liability insurance and expenses without LLC. Is renter insurance another way to limit liabilities?

1b. Anyone has tried to get renter to sign liability waiver to some certain extent? Of course landlords do not want to use that as an excuse to provide unsafe housing, it is merely for liability protection. Not sure if it is legally allowed. 

2. Good to know!!! Is there limitation on ownership structure in 1031 exchange? For example, SFH is personal asset, then I upgrade to Multi Family owned by LLC (maybe with a couple of other investors). 

Thank you very much.