Multi-Family Advice

Lessons Learned From Closing on 253-units

By April 20, 2018 February 10th, 2019 No Comments
Yesterday we closed on a 253-unit value-add apartment complex in San Antonio. This property sits 2 miles from a 192-unit property we closed on in November of last year. In total, we raised roughly $9.5 million dollars in equity, and we’ve seen our total portfolio pass the $70 million and 700 unit thresholds.
As we do for every deal, we reflect on what we learned during the acquisition and closing process, and what has led us to this point today. For this acquisition, there are two main takeaways. To us, these aren’t as much revelations as they are reinforcements of two core beliefs that we operate our business upon. Either way, they were critical to our success.
This is a relationship business. This is a mantra we repeat over and over. It’s a central part of the way we build our brand and business. We fundamentally believe we are in the relationship business, not the real estate business. This closing has only reinforced that belief.
We bought this deal from the same seller as our last acquisition that closed in November.Throughout that closing, we took steps to ensure that we were a “good buyer”.Not only did we perform, we were overly communicative, we didn’t quibble over small issues that came up and we made sure it was an easy transaction for the seller and broker.
Before that deal even closed, we had built up a good enough relationship that we had been alerted that this asset was coming down the pipe. We were able to tour it before anyone else, start work on our detailed underwriting and determine what our CapEx plan would look like. Before this officially hit the market, we had already had multiple conversations with the broker about it and were able to communicate our thoughts on the deal directly to the seller.
We also used the same debt team as the previous asset. Given that we had all just transacted, we were very confident in how this seller operated their assets and how our final numbers would shake out. This gave gave the seller and the broker additional reassurance this transaction would be as smooth as the previous one given the team was all the same.
At the end of the day, our relationship with all the parties prevailed, and we were awarded this deal despite there being several higher offers from other groups. The seller was confident in our ability to close, the brokers like working us and we’ve added a beautiful asset to our portfolio.
Creativity is vital to success (and a favorite part of our business.) When rattling off our favorite things about the multifamily business, we often mention Creativity. Sometimes this catches people off guard, as it’s usually thought of as a structured, conservative, financial-oriented industry.
While that’s true, it is also full of creativity. We get to be creative in our vision for a new brand identity at the property, the amenities and value-add strategies we want to employ. Even in the entity structure and how we put together a deal with partners and investors. We can be creative on so many aspects of this business.
For this acquisition, we presented a creative offer structure that helped us win the deal. It also demonstrated a deep understanding of the current situation, allowed us to engage the seller in conversation, and ultimately created a win-win scenario.
So what did we do?
When the property was being marketed, the sellers were in the process of rolling out a new tech amenity program. This was something they were doing across their portfolio nationally, but just happened to coincide with their loan coming due on this property. The tech amenity was going to create an additional income stream for the property that didn’t exist today. However, it was not in place and they were not collecting income off it yet. Here is where the creative offer structure came together.
We proposed a baseline offer price that did not include any cable income. And then we put in a tiered earn-out for the seller with several hurdles in place. If, at the agreed up on date, there were X% of residents enrolled in and paying for the cable and internet, our purchase price would increase by an agreed upon dollar amount. If Y% of residents had enrolled, the purchase price again increased.
Why would we do this? As the enrollment increased and collections were shown on the income statement, we were going to be able to count that towards our loan underwriting—so the more residents they had enrolled, the higher our loan proceeds would be. By incentivizing the seller to increase enrollment, we created a win-win scenario, and more importantly used creativity in our offer structure to help get us the deal.
The seller did meet all the hurdles, and we are taking over a property where over 90% of the current residents are already enrolled in and paying for the tech amenity program—and we can start collecting on that from Day 1 of ownership, vs having to chase down residents and get them to enroll. We’re happy, the seller is happy. Done and done.
As we reflect on this acquisition, we’re obviously thrilled to add it to our portfolio. We’re also excited to see some of our core operating principles play out and have such a big role in us getting this deal in the first place. Don’t ever forget this is a relationship business—and that creativity and outside the box thinking can go a long way in achieving your goals.

 

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