Download Website Content 1-5-11 - Synergetic Investment Group

Home Page
Synergetic Investment Group, LLC acquires multi-family assets in U.S. emerging markets. We
look for stabilized and distressed assets that provide our investors above average rates of
return and a strong equity position. Our investment strategy provides qualified investors an
opportunity to expand and diversify their investment portfolio and participate in all the benefits
of owning commercial real estate without any of the acquisition, management or sale
responsibilities.
Our company looks for 100 – 150 unit B & C class assets in B & C areas that are in a predictable path of
progress, revitalization areas, or areas poised for new development. We use stringent underwriting and
due diligence criteria in determining an asset’s investment worthiness, using a thorough and
conservative approach.
We finance our assets through debt and equity. The debt financing provides leverage for strong returns
while the equity financing is a vehicle for investors to diversify their portfolio through real estate
investing.
Our assets are managed by professional property managers and are constantly monitored to ensure the
highest level of performance. By buying right and managing well we can raise the value of the asset
through forced appreciation. Our exit is timed to take advantage of the rise in the economy and most
profitable stage of the market cycle. Our hold period is approximately three to seven years.
There are a number of opportunities already occurring in the multi-family market. Over the next several
years the number of maturing loans and distressed assets will provide a tremendous opportunity to
acquire assets at greatly reduced prices. And as the economy recovers, demand for multi-family housing
from a demographic of over 74 million echo boomers (children of the baby boomers) and increasing
immigration will exceed supply, creating an enormous opportunity to maximize rents, occupancy and
asset value.
Our competitive advantage lies in the strength of our relationships with brokers and real estate
professionals who provide us new on and “off-market” listings, our straightforward organizational
structure, defined operational systems and a ready pool of investors that enable us to respond quickly
and decisively to an opportunity, along with our awareness of market cycles that allows us to enter and
exit the market ahead of the competition.
The next few years will provide the perfect storm for multi-family investing. With relatively low interest
rates, growing demand as the economy recovers, limited new supply projected to come on-line, limited
competition as investors sit on the sidelines, and the increasing opportunity for discounted prices, the
time to invest is now!
Our company consists of the principals who manage the business on a daily basis, in conjunction with
real estate professionals providing auxiliary services, and advisors who serve as real estate mentors.
Our investment portfolio includes four assets, consisting of over 700 units in two emerging Texas
markets.
About Us Page
Our business is built on relationships - relationships with our brokers, lenders, property managers,
attorneys, accountant and investors. We pride ourselves on our ability to communicate, develop
cooperative relationships and deliver on our promise to provide quality housing to our tenants and
strong returns to our investors.
Segue XXXXXXXXXXXXXXXXX
Executive Team
Jeff Greenberg, MBA has over thirty-five years experience in management, staff supervision,
development and training. He has proposed, implemented, and supervised million dollar budgets for
two government agencies, as well as private and public organizations. As a Network Engineer he
procured, configured and maintained hundreds of thousands of dollars of computer infrastructure
equipment. For the past five years Jeff has been buying, rehabbing and selling single family houses in
addition to investing in multi-family assets in emerging markets. Jeff focuses on acquisitions, investor
relationships and development, contract negotiations, business systems development, business
management and asset management.
Dee Thomas has over seventeen years experience in administration, finance, management and human
resource development. She served in the U.S. Army, Alaska Air National Guard, as Finance/HR Manager
to an Economic Development Corporation, and Business Consultant to a variety of business owners and
managers. Dee has bought single family homes either through short sales or creative financing and for
many years has understood the long term value of multi-family investing, acquiring numerous assets in
emerging markets. Dee is a strategic, analytical thinker whose strengths lie in due diligence, financial
management and operations. Dee focuses on underwriting and analysis, due diligence, investor
relations and asset management.
University of Alaska Anchorage.
She graduated cum laude with a B.B.A in Management from the
David A. Garganta has worked several years in construction and has served 29 years in the Alaska Air
National Guard in the aircraft maintenance field as both technician and Superintendent. As a Chief
Master Sergeant he is a visionary leader with vast supervisory and management experience. David is
organized, resourceful, insightful, effective, enterprising, and knows how to get the job done well and on
time.
Professional Services
Ryan W. Crandall with the law firm Leggett and Clemons serves as counsel and brings his expertise in
real estate transactions, business and corporate law and estate planning. Ryan’s real estate experience
is broad and includes residential and commercial foreclosures, lender representation and transactions
involving the acquisition, financing, refinancing, development, leasing and disposition of commercial
property. Prior to joining Leggett and Clemons, Ryan was involved in the construction, development and
management of both residential and commercial properties. Ryan graduated from the University of
North Texas (B.B.A. Business, with honors) and Texas Tech University Law School (J.D., magna cum
laude).
Stephen E. Hall, President of Robert Hall & Associates prepares the company’s tax returns and
provides on-going tax consulting services. Stephen is a well qualified and results-oriented tax
consulting professional with over eleven years of experience. He is skilled at educating clients
on tax accounting capabilities and recommending the best options that meet short-term and longterm needs for both personal and business related tax issues. He is successful in the real estate
field, purchasing and selling on both small and large scale projects.
Eric Stewart is a licensed mortgage broker with Commercial Capital North America providing commercial
acquisition and refinancing services. CCNA is engaged as a commercial mortgage advisory firm and
correspondent lender through strategic partnership positions, providing exceptional access to key
capital market pools and equity investment funds.
Kent Littlejohn, President/CEO of the National Condo & Apartment Insurance Group provides
insurance services for multi-family real estate investors. With over 20 years of insurance
experience and a growing list of strategic partners, NACAIG brings expertise and knowledge to
properly protect assets at a reasonable cost.
Advisors
Charles Dobens has over twenty years of experience in marketing, sales, business management
and ownership. In 1995, he founded and successfully raised private capital for a benefits
administration firm. Charlie’s expertise is in business development, asset acquisition, contract
negotiation, legal, compliance, investor relations, and business administration. His company
currently owns over $20 million in multi-family assets. Charlie is a graduate of Boston College
and Massachusetts School of Law.
Don Goff has been a real estate investor for six years and has quick turned many properties along with
owning 471 multi-family units in three emerging markets. Don is an instructor for a monthly real estate
education class at his local Real Estate Investment Association (REIA).
Multi-Family Property Page
1.0
Real Estate
3.1
Why Real Estate?
Simply stated - people will always need a place to live. Land is scarce in many developed cities, the
population continues to grow exponentially as children move out and form new households, foreigners
continue to immigrate in large numbers, and aging baby boomers live longer. From 1960 to 2000 the
total population of the United States grew 36% from 179,323,000 to 281,421,000, and is expected to
grow another 36% to 438,000,000 by 2050. Real estate is a commodity that will always be in demand.
The laws of supply and demand dictate that real estate prices rise over time. In fact, despite the impact
of recessions on real estate, prices have historically risen over time. When prices fall, they don’t often
fall below their previous lows, and when they rise, prices often rise above their previous highs. The
following graph shows the steady rise of values over the long-term.
Investing in real estate can be an active business or a passive investment, but unlike other business or
investments, this investment is backed by real property. And not all business endeavors or investment
opportunities provide all the benefits that real estate provides. In addition to portfolio diversification,
the benefits of investing in real estate are IDEAL.
I – Income produced by cash flowing assets
D – Deprecation expense
E – Equity buildup through loan amortization
A – Appreciation through increase in value
L – Leverage obtained through bank financing.
3.2
Why Multi-Family?
Multi-Family vs. Single Family
Residential real estate value is based on the comparable sales approach; what the house down the
street sold for determines the maximum price you can command regardless of what has been done to
improve the house. Often times when single family homes are rented, rents barely exceed the cost of
financing, taxes, insurance and maintenance. And losing a tenant creates a 100% vacancy. Multi-family
investing achieves economies of scale over single family real estate. Having more units under one roof
lowers the cost per door and increases the efficiency of management. And if a unit is vacant, the loss
only represents a small fraction of total income.
Additionally, multi-family values are based on the income approach - the business operation of the
multi-family asset. The value of a multi-family asset is in the income stream. For every $1 increase in
the Net Operating Income (NOI), the value of the asset is increased by $10. To illustrate, by raising rents
$10 per unit in a 100 unit asset, NOI is increased by $1,000 a month, or $12,000 a year. If you are
anticipating a Capitalization Rate (the rate of return if you paid all cash) of 10%, then the value of the
asset has just increased by $120,000! ($12,000 NOI divided by 10% Cap Rate equals a value of
$120,000).
Multi-family vs. Stocks
According to the Wall Street Journal (11/14/09), stock performance for the 10 year period through
9/30/09 was -.2%. Marcus & Millichap, the leading commercial real estate brokerage firm in the U.S
reports a return of 199% for multi-family assets during the last 10 year period!
Long-Term Real Estate Returns Outperform Stocks
236%
250%
207%
202%
199%
Total Returns as of 3Q08(%)
200%
150%
106%
100%
100%
90%
81%
1 year
5 years
10 years
50%
35%
29%
3%
6%
5%
6%
0%
-22%
-50%
Reproduced from
Marcus & Millichap
2009 Annual Report
There are many reasons why real estate outperforms the stock market. Investors have more control
over their real estate investments than they do with large conglomerates and publicly traded stocks.
Additionally, real estate is a commodity in demand that has proven to exponentially rise in value over
time, providing a more stable investment and earning higher returns than other types of investments.
Multi-family vs. Other Commercial Investments
Of all the commercial asset types, multi-family has proven to be the most stable. During strong
economic times all types of commercial real estate do well, but in down times, as stores and businesses
slow down or close their doors, retail, office, warehouse and industrial lose major tenants and can
sometimes sit completely vacant. Multi-family owners can be more flexible and react quickly to a
changing market conditions by making small concessions to new potential renters in order to maintain
occupancy levels.
In many down markets, multi-family performs better than other commercial sectors because people still
need a place to live. As housing foreclosures increase, renters turn to the multi-family market as rents
remain affordable and renters don't have to make a long-term commitment. And many people who
would like to buy a home choose to wait, deciding it's better to keep renting instead of taking on the
financial burden of a monthly mortgage payment.
In most markets, multi-family has proven its resilience during this recession. Multi-family fundamentals
have been the most stable of any asset sector throughout the downturn. Multi-family is going to remain
the strongest sector during the next few years. (Marcus & Millichap)
3.3
Why Now?
Multi-family fundamentals have been the most stable of any asset type throughout the downturn. The
return of millions of households to the rental market after temporary homeownership, the emergence
of echo-boomer renters, and a significant drop in new supply will ultimately lead to several years of
strong rent growth. There will be increased acquisition opportunities and distressed assets for sale,
more than any time in recent history. (Marcus & Millichap 2009 National Outlook)
“Now is the time to look for the bargains and close the deals while the market is in a downturn. A
tremendous amount of capital is waiting for well-priced, quality assets to be offered for sale, and many
investors have begun to move off of the sidelines. Economic recovery will require several quarters to
gain momentum; however, investors awaiting the return of strong economic expansion to redeploy
capital into commercial real estate risk missing attractive acquisition opportunities.” (Marcus &
Millichap – “Opportunities Emerging for Commercial Real Estate Investors.”)
The next year will provide the perfect storm – with relatively low interest rates, limited supply,
increasing demand, little competition and the potential for discounted prices. The Time To Invest Is
NOW!
Investment Criteria Page
2.0
From Acquisition to Exit
4.1
Acquisition
Each asset is acquired by a Limited Liability Company and is the sole asset of that LLC. Our acquisitions
meet the following criteria.
Emerging Markets. We acquire assets in emerging markets, markets that have shown strong, steady job
and economic growth and are forecasted to continue the same pattern. These markets often have well
diversified economies, government that supports and encourages business development, and an
atmosphere that provides high quality of life for its residents. It is in these thriving markets that values
grow faster than in other areas of the country.
Emerging markets can be labeled as new growth markets or correcting markets from a previous cycle
downturn. There are many variables that are used to identify these markets from historic growth
patterns to future projections. Job growth is one of the most important components in this complex
evaluation process and is used with a myriad of other factors used in measuring whether a market is
truly emerging.
The current economy provides great opportunities to acquire assets at deep discounts in markets poised
and ready to recover quickly as the national economy recovers. We are currently looking for acquisitions
in some of those markets.
Asset Location. Our assets are strategically located in a predictable path of progress, revitalization area,
growing area, or area poised for new development that are in high traffic areas with diverse and stable
industries.
Asset Class. We seek B & C Class assets in B or C Class areas. ‘Class’ is determined by age and condition,
and we have experienced that B & C Class assets achieve higher overall profitability over the low cash
flowing A and high maintenance D type assets.
Asset Size. Our company prefers 100-150 unit complexes, but will acquire smaller or larger complexes
that meet our other acquisition criteria.
Asset Age. Assets built in the mid 1970s or later.
Occupancy. For momentum plays we seek stabilized assets (85% or higher occupancy) and at least 60%
occupancy for distressed assets.
Unit Mix. We prefer a higher percentage of two bedroom units but will make considerations based on
historical occupancy rates.
Value Add. Our company seeks assets with a value add component, for example, one that has
management or maintenance issues that can be easily remedied, such as low occupancy, low rents, high
expenses, or high turnover. It is in these value plays that income can rise quickly. Increases in income
create increases in value. This is known as forced appreciation.
Momentum Play. These assets cash flow at closing. Immediately after acquisition we implement value
plays that over the course of the hold period, momentum builds as the asset grows in value.
Repositioning. We also look for distressed assets to renovate and reposition for a handsome profit
when sold, typically one to three years. “Repositioning” involves rehabbing the asset, changing the
tenant profile and/or marketing a new image to the community. Repositioning requires a significant
investment of time and money before the asset becomes profitable, but once the asset is renovated and
the tenant base is stabilized, the rewards are significant. In the next few years there will be a
tremendous opportunity to acquire distressed assets.
4.2
Underwriting
We use stringent underwriting (financial analysis) criteria in determining asset’s investment worthiness.
We take a thorough, conservative approach and allow a cushion for anticipated and unanticipated
expenditures. We structure our offers based on a price that allows us to offer a strong rate of return
that is attractive to our investors.
We use the following three criteria to evaluate the financial feasibility of the asset.
Capitalization Rates. The Cap Rate is the annual rate in which the Net Operating Income repays the
purchase price. Cap rates vary from market to market, and are influenced by the stage of the market
cycle, cash requirements, appreciation potential and the asset itself.
Cash on Cash Return. The CCR is the rate of return on your cash investment. We look for investments
that will give our investors a solid rate of return in Year 1, increasing each year through implementation
of value plays.
Debt Service Coverage Ratio. The DSCR determines how much cash is left after expenses and debt
service (mortgage payment). It measures the overall profit. Lenders new tightened criteria require the
DSCR to provide a cushion of 30% of the debt service amount remaining after expenses and debt
payment. Our criteria is 50 – 60%.
4.3
Due Diligence
During the due diligence process, we do an intensive financial analysis of all aspects of the business, a
complete unit by unit inspection, an audit of all leases and tenant applications, and staff interviews. We
also hire professionals to conduct an Appraisal, Engineering Property Inspection Report and
Environmental Survey to determine the value and condition of the building, its major systems, and the
land. We consult with the local government, Planning, Permit and Code Departments, Police
Department, and Community organizations as well as conduct our own analysis of the competition and
the market. This very lengthy, thorough and multifaceted process allows us to properly evaluate the
asset for its investment worthiness.
4.4
Financing
Debt Financing. We acquire assets using new financing, assumable loans, or creatively structured seller
financing.
Equity Financing. We raise the necessary capital from equity partners with whom we share a majority
of the cash flow and equity. This equity financing is usually syndicated under the Securities and
Exchange Commission Regulation D. Rule 506.
4.5
Asset Management
Assets are managed by professional management companies who are properly screened and vetted for
appropriate credentials and experience managing a similar size and type asset. Managers are expected
to develop and maintain a management plan that addresses their marketing plan and tenant retention
programs.
While we manage the manager on a regular basis, the management company is responsible for day-today operations including marketing, leasing, collections, bill paying, repair, maintenance, tenant
relations, tenant retention and financial reporting.
Timely and accurate financial data is critical to effective business management. Managers are required
to provide weekly stats regarding occupancy, delinquencies, status of offline units, work orders,
marketing and tenant programs. We thoroughly analyze rent rolls, income statements and balance
sheets to maximize rental income, control expenses and preserve the physical integrity of the asset
while offering a level of service that will attract and retain tenants.
4.6
Exit Strategy
We intend to hold assets for a period of three to seven years. While we aim for a three to five year hold,
the recent recession is a reminder that during major economic changes, additional time may be
required. The exit is determined by a variety of factors including interest rates, inflation, the lending
environment, the local economy, and the stage of the market cycle. Depending on the type of purchase
and timing in the market, assets may be refinanced during the holding period. If refinanced, investors
may receive some or all of their initial investment upon refinance while maintaining their ownership
percentage until the sale.
Our competitive advantage is our awareness of market cycles which enables us to exit the market at the
optimal time. Depending on the market situation, we may choose to use a 1031 Tax Deferred Exchange
to “trade up” to a larger building. A 1031 Exchange allows us move all the profit from one asset to
another, deferring the tax consequences. By doing so, we can generate higher cash flows and attain
greater equity. Investors who wish to join us in the next purchase can participate in the tax deferred
benefits. Otherwise, profits will be taxable at the current capital gains rate.
All assets are listed and sold by qualified real estate brokers.
BIG “Acq Criteria Page”
Wednesday January 5. 2011
Acquistion Criteria
Bostonian Investment Group is actively seeking to acquire multifamily properties.
Our acquisition criteria are as follows:
General Criteria



Home
About Us
Current Portfolio

Potential High Yield Income Streams.
o




CURRENT PORTFOLIOAspen
PlaceCasa SerenaThe

CedarsCoventry
GardensFrench RoadPark at
SummerhillParkway
GardensSpring CreekStone
BrookStone
CreekStonehengeTimbersThe
VillageWestridgeInvestor
Various Cap rates depending on cash
requirement, appreciation potential and
property. Price range - generally $5,000,000 $50,000,000 (Prices should average 20% below
replacement cost).
Relations
 Cash Equity - "All Cash" or "Cash to Existing
Acquisition Criteria
Debt".
Career Opportunities
 Value Add Opportunities sought
Sell a Property
Contact Us
Property Criteria








Class "B" and "C"
Multifamily Residential Apartment Communities.
Minimum size - 100 plus apartment homes.
Age - open.
Utilities - individually metered perferred but not
mandatory
Roofs - pitched construction perferred but not
mandatory
Minimum Occupancy - 90%. Will consider lower
occupancy on properties requiring renovation if
the property is well located and is a value
enhancement opportunity.
Quality property, but will consider some deferred
maintenance or renovation on properties if well
located and are value enhancement
opportunities.
If you have a property you would like us to consider, please provide the
following:





Name and address of property
Last twenty four months operating statements
Current Rent Roll
Pictures
Proposed price and terms
We look foward to doing business with you.
©Copyright 2007-2009 Bostonian Investment Group™ All Rights Reserved
For more information, feel free to Contact Us

Questionnaire Page
BIG “Investor Relations Page– BIG ACTIVE SEKS QUAL INVESTORS TO INVEST IN ITS ASSETS.
If you are interested in learning more abut eh specific investment opp through bos group,
please complete the questionnaire by clicking here.
D & D PROPERTIES, LLC Qualification Form
P.O. Box 112285, Anchorage, AK 99511 907-868-7368 [email protected]
Please Fill Out and Fax This Form Back to 907 - 865 -7965
The information you supply below will be kept strictly confidential and is only for the purpose of providing you
information about possible investment opportunities, if you qualify to review such information.
From: _____________________________
Date: ____________
Mailing Address: _______________________________________________________________
Phone: _______________
Fax: _______________ Email: ____________________
I am interested in exploring real-estate opportunities. I understand I must meet either of the following
Income or Net Worth requirements, or have significant investment, business and financial experience.
Please check all that apply:
[ ] My annual net income was at least $200,000 in each of the last two years, or my joint income with
my spouse was in excess of $300,000 in each of those years, and I have reasonable expectation of the
same income level in the current year.
[ ] I have an individual net worth or joint net worth with my spouse in excess of $1,000,000.
[ ] I am capable of evaluating the merits and risks of prospective investment opportunities based on my
knowledge and experience in investments, financing, and business matters.
[ ] None of the above applies.
Amount interested in investing:
[ ] $25,000 to $50,000
[ ] $50,001 to $100,000
[ ] $100,001 to $250,000
[ ] $250,001 to $500,000
[ ] $500,001 to $1,000,000
[ ] $1,000,000 +
This is not an offer to sell or solicitation of an offer to purchase an investment or security. This information
relates to possible real estate opportunities for qualified purchasers who have established an existing
substantive relationship with D & D Properties, LLC. Natural persons qualify as investors by virtue of preexisting relationships and by proof of income, net worth, or knowledge/experience.
I/we hereby certify the above is true and correct.
____________________
__________
____________________
__________
Signature
Date
Signature
Date
Current Offerings Page
Appendix I - Current Assets
Our investment portfolio includes four assets, consisting of over 700 units in two emerging Texas
markets.
Dove Tree Apartments – 200 Units Tyler, TX - $9.8 Million
Abilene Assets: Hunter Ridge, a 200 Unit built in 1982; Cedar Creek, a 124 Unit built in 1973 and
Windsor Place, a 228 Unit built in 1982.
For more information regarding D & D Properties, LLC and its partnering opportunities, contact Dee
Thomas at [email protected] or call 907.868.7368
Disclaimer
Resources
Contact Us
Fill in or just our info
Flex Page 1 Opportunity Page? See Demo
Competition & Opp below in unused portion
Flex Page 2
Investment Opportunity
10.1
A Diversified Portfolio
Financial analysts suggest that portfolios should have at least 25% of their investments in alternative
assets. The lesson to be learned from the previous stock market crash is that diversification is the only
way to protect your wealth.
We provide investment opportunities to private investors looking to diversify or expand their
investment portfolio. We provide an opportunity to participate in all the benefits of owning
commercial real estate without any of the acquisition, management or sale responsibility. Investors
who join us in our acquisition receive a majority of cash flow during the hold period and equity upon
sale of the asset.
10.2
Multi-Family Investing Through Self Directed IRAs (SDIRA)
“It’s not important how much money you make; it’s how much of it you actually get to keep.”
Taxes are the biggest erosion of wealth. The average person loses 40% – 50% of their income because
of taxes – payroll, federal income, state income, property, excise, state and local sales tax and more.
In 1975 the IRS gave retirement investors a gift – the Self Directed IRA – and over thirty years later it is
still a little known investment tool! Investing through a self directed IRA allows individuals to purchase
real estate investments with retirement funds held in many common forms of IRAs, including 401(k)s,
Traditional IRA, Roth IRA, and Simplified Employee Pension Plan (SEP-IRA). This vehicle provides tax free
(Roth IRA) or tax deferred (non Roth IRA) investing opportunities. For example, this strategy allows
investors to invest money from their SDIRA by using pre-tax money (income which has not been taxed
yet), and their SDIRA will receive the return on investment tax deferred. Investors using a SD Roth IRA
will receive their return on investment tax free. For high net worth individuals, this benefit alone could
mean an additional return on their investment of up to 35% in tax savings! And for high net worth
individuals who were previously ineligible to participate, 2010 will be the first opportunity to take
advantage of this tax advantaged opportunity.
SDIRAs appeal to investors who may not be comfortable with the volatility of the stock market.
Traditional and Roth IRAs, usually invested in a combination of stocks, bonds and mutual funds give
investors another investment option and provides more control in how their IRA is invested. We work
with a number of Independent IRA Custodians and can provide our investors a list of Custodians upon
request.
10.3
How to Invest in Our Multi-Family Assets
We seek two types of investors.
Accredited Investors have an annual net income in excess of $200,000 in each of the last two years, or
joint income with spouse in excess of $300,000 in each of the last two years, and have reasonable
expectation of the same income level in the current year. Or, they have an individual net worth or joint
net worth with spouse in excess of $1,000,000.
Sophisticated Investors have significant investment, business or financial experience and are capable of
evaluating the merits and risks of the prospective investment.
Before investing, we require investors to complete a Questionnaire to ensure they meet our investor
criteria. Qualified investors then receive a Property Package describing the physical and financial
aspects of the asset. Participating investors receive a Private Placement Memorandum (Offering),
Subscription Agreement (Disclosures) and Operating Agreement (Limited Liability Company Guidebook).
Investors then sign the documents and transfer funds. After closing we issue investors a Certificate of
Ownership for their share of ownership.
Before and during the hold period we conduct conference calls to provide information, current status,
and answer any questions. On a quarterly basis we distribute the investor’s share of the cash flow,
along with quarterly financial reports and asset management reports.
Flex Page 3
Unused from Biz Plan
Market Cyles
Demographics
Competition
Factors Affecting Acquisition & Sale
Risks
Opportunties
3.0
Market Analysis
5.1
Market Cycles
An economic cycle is the natural fluctuation of the economy between periods of expansion and
contraction. Cycles run anywhere from twelve to twenty years. Factors such as gross domestic product
(GDP), interest rates, levels of employment and consumer spending help determine the current stage of
the economic cycle. The four economic stages are recession, recovery, expansion, and hyper supply.
Each stage lasts approximately three to five years. The same cyclical pattern holds true for real estate.
It is in knowing the stages and responding accordingly that allow us to invest or divest at the optimal
time.
Investors who do not know the signs or are just expecting the market to continue moving in the same
upward or downward direction, simply follow the crowd. Because we watch market cycles, we are
contrarians. When the market is hot and everyone is in a buying frenzy, we look to sell, and when
everyone is selling or waiting on the sidelines, we buy. This strategy is contrary to what customarily
happen in a changing market. We subscribe to the infamous Warren Buffet quote, “We simply attempt
to be fearful when others are greedy and to be greedy only when others are fearful.”
In a Recession, the real estate market is oversupplied with new and existing construction, demand for
property falls and values fall. While unemployment is rising to its highest levels, foreclosures are
increasing to their highest levels; tenants take on roommates, and children move back home. As a
result, vacancies increase and rents fall or remain stagnant. The bottom is falling out of the market.
Only local investors and outside investors who know the market are acquiring assets. The only thing
that will turn a recession around is jobs. Once jobs start to grow, whether by decreasing unemployment
or new jobs moving into a city, the economy starts to improve, and it’s time to start investing.
It is important to note that real estate, like the economy, is local, not national. Factors affecting one
market may not affect another market, for example a major industry or employer opening or closing its
doors. In a recession, some markets weather the storm fairly well while others struggle to recover. The
acquisition strategy in this stage is to buy in markets that were strong before the recession and remain
relatively strong despite the recession or to buy when we know something is about to happen in that
market that will create a positive change, i.e. job growth. By buying later in this cycle, and buying with
strong positive cash flow we create a margin of safety that provides us the ability to stabilize or reduce
rents, if necessary, and absorb vacancies. And as the market rises, our cash flowing asset is poised for
even greater cash flow and immediate appreciation. The selling strategy during this stage is to hold the
asset until later in the expansion stage.
During the Recovery stage jobs are created, unemployment begins to rise, and the population begins to
migrate back. As demand rises, the market starts to absorb the oversupply, values slowly begin to rise,
foreclosures begin to decline, vacancies begin to drop, and rents have started to increase for the first
time. The market has turned the corner. This is the first half of an emerging market.
As more jobs are created, competition for labor increases which leads to increases in wages. As wages
increase, spending increases and thus more jobs are created. With higher incomes, more people can
move into their own apartment and adult children move out of the house. As demand for housing
increases, rents increase. Assets that are already cash flowing are now generating even more income. A
time of prosperity has begun.
Investors now realize this is a money making opportunity and locals who were once skeptical begin
investing again while out of town investors start to enter the market. As a result, demand increases,
starting to absorb oversupply and in turn, values rise and appreciation grows, especially for assets
purchased prior to or early in this stage.
Everything is on the rise. This is the best time to buy! And since demand for properties has just begun
to rise, it is the best time to hold. During the next three to five years values will continue to rise. The
strategy in this stage is to acquire as many assets as is practical, paying near or at market prices to get
into them early, rather than offering too low and not getting into them at all.
The Expansion stage is the latter half of the emerging market. Employment continues to increase,
wages keep rising and the number of people per household continues to drop. While supply is
absorbed, demand is strong and rents have risen to a point where it makes sense for builders to build
again. Local and out-of-state speculators jump into the market, setting demand at its highest peak. As
demand increases, supply dwindles. Competition is fierce as days on market drop dramatically.
Property prices and rents continue to soar, which fuels further speculation and development of raw
land. Investors and contractors are assuming the market will continue to rise. They bid up the price
thinking they can quick turn them. They are buying for appreciation, not cash flow.
If we bought in the latter stages of the recession or during the recovery, we have already amassed
significant equity. Even acquisitions early or mid way through the expansion stage have equity.
Depending on where we are in the market cycle there are three strategies. Early to midway in this
stage, a strategy is to sell using the profits as the down payment on a bigger asset in that same rising
market. Another strategy early or mid way in this stage is to buy and hold, or continue to hold because
there is still room for rents to rise, hence values to increase. During the mid to late stages, the best
strategy is to sell for maximum profits, moving the profits into an emerging market and repeating the
process.
Hyper Supply is a very risky stage of the market cycle. At the beginning of this phase, buyers have left
the market and properties sit for longer and longer periods of time, but sellers are still getting inflated
prices. Land is still being purchased for speculation and the amount of construction in the pipeline
becomes excessive; the potential for overbuilding becomes great. For the first time since the start of
the Expansion stage, business and job growth start to slow. Investors realize that the market is changing
and start putting their properties on the market in hopes of realizing their profits, or are trying to get
out of overpriced properties they bought at the top of the market. Inventory increases as days on
market grow. Desperate sellers must now lower their prices.
One strategy in this market is to buy in the final stages of this market when huge discounts can be
found. With considerable equity and high cash reserves, properties that can weather a recession are
poised for spectacular gains in future years. This is not our strategy. By paying attention to job growth
and supply we will see the early signs of this stage and sell any remaining assets in that market, if any,
and move on the next emerging market.
Our competitive advantage is our focus on emerging markets and our awareness of market cycles. We
see the signs and act before most investors, so we are ahead of the competition when buying and selling
multi-family assets.
5.2
Demographics
The tenant profile we seek is based on the following demographic information.
Age. The prime rental age is 18 -34 years old, which according to the US Census Bureau accounted for
approximately 27% of the population for the years 2006-2008. There is also a percentage of the
population over age 34 that rents during transitional periods in their lives, and others are perpetual
renters having no means or desire for homeownership.
Echo Boomers, the genetic offspring and demographic echo of their parents, the baby boomers, are the
largest generation of young people since the 1960s. They are beginning to come of rental age
representing nearly one third of the U.S. population and will continue to grow as young adult
immigrants arrive and add to their ranks.
For multi-family owners, the number of people turning 18 each year is a significant
demographic. At this age, young people are starting their first jobs or going off to college. As a
result, they drive up demand for student housing and Class B and C class assets, generally
sharing with roommates. Over four million Americans will be turning 18 annually through 2020.
(Multi-Housing News)
Population. In addition Echo Boomers coming of age and aging Baby Boomers downsizing to
rental units, the in migration into the United States - mostly renters - is estimated to grow 10
million over the next ten years. This will create very strong demand for multi-family housing.
Income. We target individuals who earn up to $35,000 annually. Since market rents and per capita
income vary by area, we typically verify that their income is two and a half to three times the rent, as a
means to ensure they can afford the rent and will make timely payments. As you can see below, the
largest number of renter households fall within our income range.
Apartment Household Incomes, by Income Categories
2009
Number
Income
Households (000's)
of 2008-2009
Annual Changes
<$20,000
5,720
2.3%
$20,000-$49,999
6,420
4.5%
$50,000+
4,560
-4.0%
Source: NMHC tabulations of the US Census Bureau's 2009 Current Population Survey Annual Social and Economic Supplement
(www.census.gov/cps). Apartment renters are defined as those in buildings with five or more units (excluding mobile homes). Income figures
recorded in 2008 are adjusted for inflation using the Consumer Price Index. Updated 9/11/2009
Employment. B Class renters commonly have white collar jobs; C Class renters have blue collar jobs.
Since 80% of renters come from within a 3 mile radius, we look for the prevalence of office and retail to
determine if nearby employment can meet the needs of our renters.
Renters vs. Homeownership. Thirty three percent of the population resides in renter occupied housing.
Of those, forty-four percent reside in 5+ unit multi-family housing.
U.S. Households: Renters & Owners
Number
of % of
Type of Household
Households (000s) Total
U.S. Number
Residents (000s)
Renter-Occupied Housing
38,363
33%
92,244
Owner-Occupied Housing
78,842
67%
209,240
of
Total
117,205
100%
301,484
Source: NMHC tabulations of 2009 Current Population Survey, Annual Social and Economic
Supplement, US Census Bureau (http://www.census.gov/cps). Updated 9/11/2009
What Type of Structure Do Renter Households Live in?
Number
of
Percentage
Households
Type of Structure
Households
(000s)
Single-family homes
12,627
of
Number
Residents
(000s)
33%
36,643
Structures with 2 to 4
7,292
Units
19%
17,472
Structures with 5 or
16,700
more units
44%
33,684
Mobile Homes
1,603
4%
4,174
Other
141
0%
271
Total
38,363
100%
92,244
of
Source: NMHC Tabulations of 2009 Current Population Survey, Annual Social and Economic Supplement,
US Census Bureau (www.census.gov/cps). "Other" housing includes units in hotels, rooming houses,
dormitories, tents or unspecified housing. Updated 9/11/2009
It is interesting to note that early in 2009 the National Foundation for Credit Counseling released survey
results showing almost half of all American adults no longer view home ownership as a reliable way to
build wealth and thirty one percent don't expect to ever be able to own a home. “For many, the
American dream - the long-held goal of owning your own home - is no longer feasible or even desirable.
It appears the foreclosure crisis has cast a pall over homeownership that may not lift for years.”
4.0
Competition
6.1
Multi-family Buyers and Sellers
There are basically three groups of multi-family buyers. 1) Sole Proprietors/“Mom & Pop” type
operators who buy smaller assets and self manage. They buy primarily for appreciation and their
strategy is to hold long-term. 2) Institutional Investors (banks, insurance companies, pension funds,
hedge funds, mutual funds and endowment foundations) and Real Estate Investments Trusts (REITS) buy
portfolios of large A & B assets. They focus primarily on income and the opportunity for long-term
growth. 3) Limited liability companies whose members are individual investors or investor groups buy
mid to large size assets of all classes and varying hold periods. We are in this group of buyers. Our
strategy is to acquire mid size B & C assets for both income and appreciation, with a mid-term hold
period.
From acquisition to sale we do not compete with Sole Proprietors and Institutional Investors/REITS as
they seek different size assets. Interestingly, however, Institutional Investors/REITS actually supply
assets because they sell off mid-size assets acquired as part a portfolio, or B class assets aging into C
class. The competitive advantage we have purchasing mid size assets is two-fold, our relationships with
brokers and real estate professionals who provide us new on and “off-market” listings, and our
organizational structure, operational systems and pool of investors that enable us to respond quickly
and decisively to an opportunity.
6.2
New Multi-Family Construction
New multi-family complexes are often high end luxury units or low income housing, as B and C assets
are typically not economically feasible. Any construction of B and C quality assets within a five mile
radius can be considered competition, although cost of new construction often demands higher than
current market rents. Prior to acquisition, we research the existing competition, as well as new
permitting/construction to assess the competition. We do not buy in areas where new construction
poses a threat or are already saturated with multi-family housing.
6.3
Homebuyers
Home and condominium buyers, whether due to new construction, low interest rates, declining home
values, or first-time home buyer incentives create competition for multi-family rentals. Wages, median
income, and interest rates factor into the Housing Affordability Index, which measures whether or not a
typical family can qualify for a mortgage loan on a typical home. When income is sufficient to buy,
renters who desire home ownership will move out to buy homes and condominiums. The quantity of
new construction and the affordability index determine the impact on multi-family occupancy rates.
Occupancy rates affected by these factors can be mitigated through aggressive marketing, a solid
reputation for quality housing, and a strong tenant retention program.
5.0
Factors Affecting Acquisition & Sale
7.1
The Economy Weakens
The history of recessions in the United States show that they are a natural part of the economic cycle.
When the economy weakens a property may not operate at the income and expense levels projected at
acquisition. Fortunately, by acquiring assets based on actual, not proforma financials, and planning for
potential higher vacancy and delinquency rates, increases in expenses and/or stagnant or declining
rents, we build in a margin for contingencies. Additionally, aggressive marketing and streamlined
operations can help offset a downturn in the market. And by acquiring cash flowing assets in the latter
stages of a recession, we are poised for growth during recovery. Any plans to sell that are affected by a
down market would likely be postponed, unless sufficient profits could be attained at a lower than
projected selling price.
7.2
Changes in Interest Rates
Interest rates fluctuate over time, from the highs of the early 1980s to the lows of the late 2000s. From
an acquisition standpoint, interest rates are indirectly factored into our decision as the cash on cash
return determines the price we are willing to pay. During the hold period, fluctuations in interest rates
will dictate whether or not to refinance, or to sell early. Prior to sale, if values are impacted by high
rates, we may defer the sale or proceed if anticipated profits have already been achieved through forced
appreciation gained from diligent asset management.
7.3
Inflation
Inflation affects purchase and sale prices similarly to increases in interest rates. However, during the
hold period, as prices rise, rents also rise. With income as the larger percentage of the budget, small
increases in rent can equal or exceed larger increase in expenses. The impact of inflation can not only
be minimized, but can increase the return to investors when combined with efficient operations, fixed
debt service, and cost savings measures. As a buyer, finding great deals may become more difficult, but
we buy based on cash flow and returns that meet our criteria. If an asset meets our strict criteria, it is a
good buy. As a seller, we would welcome the opportunity to sell as long as it would provide us the
projected returns.
7.4
The Lending Environment
The lending environment determines the type of lenders active in the market, and thus, the terms
and conditions of the loans. During the heyday of lending in the mid 2000s, private lending
companies prevailed as the preferred financing source. But because of the mortgage meltdown
and subsequent credit crunch, many lenders have limited liquidity because they are reserving
capital for problem loans, and are therefore unable or unwilling to lend. This has taken most
lenders out of the current market. As a result, there are limited local and regional commercial
banks and agency lenders in the market. Currently, most loans are sold to the Federal Housing
Administration (FHA), Federal National Mortgage Association (Fannie Mae) and the Federal
Home Mortgage Association (Freddie Mac) and must meet their guidelines. Recently, Fannie
Mae Multi-family has shifted from being primarily a multi-family portfolio market participant
holding onto mortgages to selling the mortgages as a Mortgage Backed Security (MBS) on the
stock market. This shift has provided necessary liquidity to the multi-family market.
Also during the heyday of the mid 2000s, commercial underwriting criteria was loose and there were a
sizeable number of loans issued through Commercial Mortgage Backed Securities (CMBS). Over the next
few years, CMBS will face severe challenges as banks begin to address their troubled assets and
maturing loans. Although most banks have set aside large capital reserves for expected loan losses,
there will be less liquidity in the market for new loans. Competition for loans will become fierce, and
only strong performing assets will prevail.
Today, lenders have imposed tighter lending criteria - stronger performing assets and borrowers with
experience and high net worth. In the next few years it is safe to assume lending will be more limited
and criteria may become even more stringent. Fortunately, because of our conservative approach, we
only acquire assets that meet our strict criteria, criteria which already exceeds the “new” requirements.
We also look for alternative sources of financing through assumable loans, seller financing, and private
investors, which will become more prevalent due to the current lending environment. By developing
relationships with sellers, mortgage brokers, sponsors and accredited investors, we form alliances to
locate and present opportunities that satisfy lender requirements, regardless of the lending
environment.
6.0
Risk Mitigation
There are inherent risks in any type of investment. The potential risk of investing in multi-family assets
is moderate compared to residential development or other commercial investments. Strong acquisition
criteria, careful due diligence, strong management and safety policies, sufficient property and liability
insurance, and proper planning can mitigate many of the risks described below.
8.1
Acquisition
We use stringent criteria and a conservative approach when acquiring assets. We carefully analyze
financial information and our underwriting is reviewed by several sources. We provide our investors the
necessary information so they can make their decision to invest and we welcome their questions and
comments. If at any stage during the acquisition process we are not satisfied, we would rather walk
away mid stride than commit to a transaction that would not meet our promise to provide quality
housing to our tenants and high returns to our investors.
8.2
New Discovery
During the due diligence process, we do an intensive financial analysis of all aspects of the business, a
complete unit by unit inspection, an audit of all leases and tenant applications, and staff interviews. We
also hire professionals to conduct an Appraisal, Engineering Property Inspection Report, and
Environmental Survey to determine the value and condition of the building and its major systems, and
the land. We consult with the local government, Planning, Permit and Code Departments, Police
Department, and Community organizations as well as conduct our own analysis of the competition and
the market. This very lengthy, thorough and multifaceted process allows us to properly evaluate the
asset for its investment worthiness.
8.3
Employee Theft
We closely monitor financial statements, bank accounts and cash flow to ensure accuracy and detect
any inconsistencies. As policy, we prohibit cash transactions, make unannounced visits, randomly
inspect ‘vacant’ units, and verify vendors and contractor bids and invoices for non routine repairs. In the
unfortunate event of employee theft or embezzlement, we would attach the asset management’s
insurance or bond policy or proceed with legal action, hiring the most aggressive local litigator. As an
added measure we could also pursue legal action filed personally against the wrongdoer.
8.4
Performance. In the event the Property Manager is not performing, we would have the right
under the management agreement to immediately terminate for non-performance. In the event the
investors are dissatisfied with our performance, the authority to exercise their rights are outlined under
the terms of the Limited Liability Company’s Operating Agreement.
8.5
Default
If one or more major events adversely affect net operating income, impacting the ability to make loan
payments, or, if the loan calls for a balloon payment and we are not able to make a lump sum payment
or refinance, the property could become delinquent or in default. In such a case, we would negotiate
with the lender for a repayment plan, ask for a capital call or sell the asset. If unable to sell, the lender
could foreclose and members of the LLC would lose the value of their investment. Fortunately, as
members of a limited liability company, limited members would have no personal liability, and the
signers of the non recourse loan would have no personal liability for any financial shortfall.
8.6
Death or Dissolution
The principals of the LLC are integrally involved in the day to day operations and would automatically
provide continuity in the event of the death or disability of a principal. In the event of dissolution of the
managing members’ LLC, the Operating Agreement would provide for one of the principals to continue
to run operations through to the sale of the asset.
7.0
Opportunities
9.1
Economic Recovery
The history of recovery and expansion in the U.S. shows they are a natural part of the economic cycle.
Economists predict the economy will see signs of recovery in the second half of 2010. As the economy
recovers and jobs are created, it will begin a cycle of spending, creating more jobs. As consumers begin
to feel relief and gain confidence, renters will re-enter the market, supply will be absorbed, and over
time, rents will rise again.
9.2
Maturing Commercial Mortgage Backed Securities (CMBS)
During the peak of the market from 2005 – 2007 a sizeable number CMBS loans were issued with loose
lending criteria. Those “peak of the market” loans will be maturing 2010-2012 and will face stricter
underwriting standards. As a result, many will not qualify for a new loan. In fact, the Deutsche Bank
reported that “perhaps 65%, or more, might well fail to qualify to refinance, at least without large equity
infusions.” Unless provided a long-term extension, owners will be forced to sell that property or other
properties under unfavorable market conditions. This will create a market of motivated sellers. In the
next few years, maturing CMBS loans will provide a great opportunity to buy at discounted rates.
9.3
Defaulting Loans
Aggressive lending of the past, proforma financials, and speculators looking only for appreciation caused
many to jump into the market unprepared and unqualified. Then a recession hit. Many of these
borrowers are already going into default. Banks, having witnessed the impact of foreclosures on the
residential market, are willing to work with commercial borrowers. If their efforts to work with the
seller fail, banks may be willing to consider a “short sale” offer, an offer that is less than what is owed by
the borrower. If unmotivated to sell short, the property would foreclosure, becoming a bank owned
property (REO). Since lenders are in the business of lending, not managing and selling property, they
become motivated to sell quickly. The number of defaulting loans will continue to increase over the
next several years, providing increasing opportunities to buy at greatly reduced rates.
9.4
Distressed Assets
Assets can become economically or physically distressed and often times are both. Economically
distressed assets result because owners/managers are not providing adequate tenant services or are
poorly screening new tenants, resulting in significant economic losses from vacancies and delinquencies.
Physically distressed assets result from owners who are financially strapped and do not have the
resources to properly maintain and manage the asset, thus causing it to become distressed. In the next
few years distressed assets will provide a tremendous opportunity to buy discounted assets that can be
repositioned for great profits.
9.5
Supply Shortage
The downturn in the economy caused a virtual halt in new construction. This trend is likely to continue
until demand and values exceed the cost of new construction, which typically is not until the expansion
stage. And as the number of distressed assets increase, many will sit vacant, become untenable, or be
torn down further reducing supply. During the recovery stage, renters will return to the market in
increasing numbers. Households and roommates who have been doubling up, as well as adult echo
boomers who were forced to move back in with parents will begin to rent again. Displaced tenants from
distressed assets will need rental units. Foreign in migration will continue to grow, further creating
demand in a supply dwindling environment. Then as the population ages, echo boomers will move out
on their own and baby boomers looking to downsize will begin to rent. Over the next several years,
demand will begin to exceed supply, creating an enormous opportunity to maximize rents, occupancy
and asset value.
The mortgage meltdown, credit crunch and recovering economy have created a perfect storm. Many
multi-family investment opportunities will abound over the next two to three years. The tremendous
opportunities that lie ahead will create wealth for a lifetime.