Check out the podcast episode (at the bottom) as we join Chris Lopez to discuss the details of this deal. Feel free to reach out with any questions and ways to improve this analysis.
- Listen to the podcast “#252: Deal Analysis – Timber Ridge 40-Unit Property” on the Denver Real Estate Investing Podcast
- Watch the YouTube video (at the bottom.)
- Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast or video.
Motivated Seller + Increasing Vacancy + Heavy Deferred Maintenance = Deal Opportunity
This property consists of 34x 1 bedroom apartments, 4x studio apartments, and 2x 2-bedroom apartments. A significant portion of the units were being leased to veterans through the Department of Veterans Affairs (VA) which, similar to other government programs, provides landlords with certain rent payment protections. I first had an opportunity to walk this property in late August 2020 after hearing about it from a commercial real estate agent with whom I had a relationship. At that time, the seller was asking $5.5M.
Over the course of the next several weeks, the building was subjected to and failed multiple VA inspections which ultimately cost the current owner their contract with the VA. The inspection failures, along with some health issues and a desire for liquidity, ultimately led the seller to reach back out to me with a reduced asking price of $5M. At that point, we decided it was a deal worth pursuing and put the property under contract with an inspection contingency.
Our findings during the inspection were concerning as the building had significant issues involving the boilers, plumbing, roof, electrical, bed bugs, etc. The verdict was a far more extensive rehab budget than we originally planned and the sales price would have to come down if the deal was going to close. We ultimately notified the seller we would need a price concession of over $500K in order to proceed with the sale. To legitimize our request, we provided the seller with a copy of the inspection report and the bids obtained to perform the construction.
In the end, we were able to reach an agreement with the seller at a final purchase price of $4.45M. The deal closed in early November under a shorter time horizon than our typical Denver multifamily closing of 6-10 months.
Penciling Out the Deal By Working Backwards
Aside from the inspection revealing significant renovations, rent assumptions following the stabilization of the property were particularly difficult to come by. Twin Lakes is not an area we had purchased in before and our due diligence revealed no other comparable sized multifamily buildings within an 8-block radius and nothing of a comparable condition to the expected finished. Additionally, given the current condition of the units, and the high vacancy, the current owners’ financials were of little value.
We ultimately worked backward in our financial modeling, starting with a number we felt most comfortable with; the final disposition price per unit. Knowing that most multi-family units in Denver are selling for between $170K to $210K per door, we used $170K and multiplied that by the total number of units to arrive at a total disposition price. From there one can solve for rents by using the cap rate formula NOI/Cap Rate = Exit Price, because we can assume cap rate and we previously solved for Exit Price, we are able to solve for NOI, thus providing a rent assumption.
Other components that ultimately pushed us to close this deal were the expected demand for this type of product (given there were no other comps in the immediate vicinity) and new neighborhood amenities being built across the street. While the building had higher vacancy in its current condition, the 200-unit apartment building approximately 8 blocks away only had two vacancies, which is an indicator that there is an undersupply in this area. Additionally, there is a new restaurant, bar, gym, Walmart, and a brewery being built in close proximity, plus multiple single-family developments being delivered as well. The sum total of these indicators suggests that this area has increased demand and decreased supply of multi-family
Timber Ridge Comps
As discussed in previous posts, commercial lending has been tricky during the COVID-19 pandemic. Some lenders reduced their loan to value ratios, others have implemented significant reserve requirements, and others have ceased to extend credit what so ever. Despite this lending environment, we were able to leverage a new relationship and obtain fantastic lending terms on this deal.
For the financing of this deal, we obtained the services of a “debt broker,” i.e., a broker that shops opportunities to a number of lending facilities. This debt broker has relationships with lenders all over the country and found a match with a bank in Kansas City that specializes in significant value-add deals on small to mid-size multifamily properties. While most local/regional lenders in the space are currently offering 60-75% LTV and no funding for renovations, this bank offered 80% LTV on the purchase and 80% LTV on the renovation budget. Although this approach typically solicits higher than normal origination fees, it offered us a fantastic interest rate.
The 80% LTV offered by this bank reduced the amount of funding we had to raise by approximately $1.2M. Instead of raising 40% of the purchase price ($1.78M) and all of the construction budget ($800K) for a total of $2.58M, we only had to raise $1.35M. The savings of approximately 475 basis points on the $1.23M that was raised via debt vice equity will drive higher returns.
Signing Leases by Springtime
We closed this deal and “started swinging hammers” on the renovations in early November 2020. We will have to obtain a permit for the roof repairs, but the remaining elements are virtually all cosmetic. We expect renovations to be near completion and leases to be available in April 2021. Once rented and fully stabilized, The VareCo will likely look to sell the property, generate returns for our partners, and repeat the process.
As with most of our deals, we were able to gain access to a very solid opportunity as a result of a relationship we developed with the seller’s agent. We were able to leverage that relationship to meet a debt broker, which in turn presented us with access to fantastic financing terms. Relationships are always key in real estate.
Thanks for reading and be sure to check out more The VareCo deals on the Denver Real Estate Investing Podcast.
Disclaimer: Investing in Real Estate involves a high level of risk. The above figures and return data metrics are strictly for the purpose of education and do not represent actual data or return values. Investing in Real Estate involves a high degree of risk and is appropriate only for investors who can afford to sustain a loss of their entire investment.