IR_Nov-Dec_2022-2

INVEST R A Think Realty Publication SPONSORED CONTENT

NOV-DEC 2022 | THINKREALTY.COM

LUKE BABICH Clever Real Estate

GARY PINKERTON Wealth Strategist

AARON RUDENSTINE ButterflyMX

Determining Your Loan Amount ERIC STEWART, ATLANTIC INVESTMENT CAPITAL, INC.

LOGAN FREEMAN FTW Investments

thinkrealty . com | 47

T he exact answer to what your loan amount will be usually is not determined until the lender issues a final loan commitment. Multiple variables can impact the loan amount during the due dili- gence process. VARIABLES IMPACTING LOAN AMOUNT At a property level, positive or negative fluctuations in cash flow may have a relative impact on proceeds. At a market level, fluctuation in interest rates will drive proceeds up

Determining Your Loan Amount One question often decides whether a deal will pencil out: What is my loan amount?

by Eric Stewart

2 :: INVESTOR REVIEW :: NOV-DEC 2022

expectation of receiving a waiver for higher leverage. Inside of this guideline there are levels, or tiers, of pre-review restrictions. In a Tier 3 pre-review market, lenders are delegated up to 65% LTV. In a Tier 4 Pre-review market, Fannie Mae lenders are delegated up to 55%. Waivers in Tier 4 pre-review markets are not likely; however, solid deals have a healthy chance of receiving the requested waiver in Tier 3 markets. This re-review designation is typically the result of a market presenting limited and/or dominant economic drivers (i.e., military, oil and gas, etc.). You will also find that max leverage is often reduced to 75% in smaller markets. Even if multiple industries are represented, limited population and market size is a concern. As mentioned, in a buyers’ market where cap rates are higher, debt service is typically not an issue. This leverage-constrained approach is used to define the loan amount, meaning leverage was capped or “constrained” by the maximum LTV allowable by the lender. As cap rates compress and interest rates rise, the underwritten net operating income will not support the same leverage as it once could. Both cap rate and debt service coverage ratio utilize NOI as a constant. So, if the NOI remains the same, and the DSCR stays the same, the resulting loan amount will, of course, stay the same. Using this same NOI figure, a compressed cap rate will increase the purchase price, resulting in lower LTV. An increased rate environment exacerbates the proceeds issue in that the NOI will support a lower loan amount, further reducing the LTV. PROCEEDS-DRIVEN METHOD. In the current market, it is common to underwrite deals using a

income. How they view your reassessed taxes and budgeted variable expenses will sway your loan amount as well. APPROACHES FOR DETERMINING LOAN AMOUNT The property-level and market-level variables impacting your loan amount are centered around one of the two core approaches lenders will use to determine your loan amount. You will find that lenders use the lesser of either a leverage-constrained approach or a proceeds-driven approach to determine your proceeds. LEVERAGE-CONSTRAINED METHOD. This is the most commonly used approach to determine your loan amount. This is the maximum loan to value a lender will allow. This approach has historically been acceptable due to the low interest rate environment and reasonable pricing that allows a property to service the proposed debt at or above the minimum required Debt Service Coverage Ratio (DSCR). Industry standard leverage is 75% to 80% loan to value in the multifamily

space. In the past, meeting or exceeding the minimum DSCR

requirements has not been an issue. In fact, in many cases, some property improvement funds have been able to be included in the permanent loan due to excess cash flow. Although a maximum leverage of 80% has come to be expected, there are certain scenarios where maximum leverage is reduced. Fannie Mae has outlined specific markets where their lenders only have delegated authority to fund up to 65% LTV. These are referred to as pre-review markets because if that lender wants to fund a loan amount above 65% LTV, they need to send the request in to Fannie Mae to “pre-review the deal, with the

or down. Most permanent lenders in the investment real estate space do not lock in the rate until shortly before closing. The best case is when they honor the rate range from the time of application. Even in that scenario, however, other property-level variables will reduce your loan amount. In some scenarios, it makes sense to purchase an Early Rate Lock (ERL). This usually makes sense only on larger, institutional-sized transactions. The appraiser’s final budgeted expense figures will be a huge driver in the underwritten

INVESTOR REVIEW :: 3

the current property operations. When borrowers are unable to secure adequate proceeds, bridge debt has been a common solution to achieve the desired leverage. It is important to guard against overleveraging when placing bridge debt on an asset that presents stabilized operations. Always make sure there is adequate forced appreciation to increase value in the short term and facilitate your exit strategy. Additionally, the bridge debt options bring more risk considerations such as refinance risk, and they may reduce your investor distributions in the first few years. If find your expected proceeds are reduced from maximum leverage, you may decide to increase your equity injection or pivot to a bridge loan—whichever option best aligns with your investment strategy. In either case, the goal is to know your options as early as possible to avoid surprises once under contract and, ultimately, to avoid the major re-trade. To avoid last-minute surprises and build credibility with lenders and investors, stay connected with Atlantic Investment Capital at www. Atlanticic.com to discuss your investment strategy and dial in the most attractive loan terms to maximize your returns.

leverage-constrained approach only to find that the cash flow from the property will not support the request. The anticipated LTV is a staple of any underwriting template, but you should also run the necessary calculations to confirm current income will support the anticipated loan amount. This is the proceeds-driven approach mentioned earlier. This approach determines the maximum loan amount the in-place cash flow will support, given a lender’s underwriting criteria. An industry standard underwriting approach is to annualize the trailing three (T3) months of rental collections and add the trailing 12 months of other income to determine the underwritten total income figure. Always remember to use a minimum of 5% vacancy loss, even if the historical vacancy is less. You may be able to reduce that to 3% vacancy in some top markets, but make sure to clear that with your lender before moving forward with that assumption. Most lenders will consider your budgeted expenses, including a reassessed property tax estimate when determining the underwritten NOI. Note that budgeted expenses will need to make sense and fall in general alignment with both the appraiser’s budgeted expenses and the historical expenses. If a line item is way out of proportion

with historical expenses, a logical explanation as to the operational plan is needed to support the change. This approach depends on underwriting assumptions and brings with it a greater chance of changing during processing. This is not a function of the lender intentionally “retrading” your loan; it’s more a function of cash flow variables changing during processing. Given the typical 60-day closing timeline. The T3 income often fluctuates and, since it is annualized, a minor change in collections can have a material impact on proceeds. On the expense side, the final insurance quote is another line item that can greatly reduce proceeds. It is crucial to communicate with your insurance broker as early as you can to determine where the annual premium will land. You should also connect with your broker or lender to confirm the debt service coverage ratio typically used in your target market. In top markets like Boston, New York, and San Francisco, lenders often use a DSCR of 1.20. In standard markets like Dallas and Phoenix, you can expect a 1.25 DSCR. This is a typical DSCR on a national level. Lenders may increase the DSCR requirements in smaller markets and lower leverage loans. Note that this applies to underwriting a permanent loan and is a representation of the health of

Eric Stewart is the owner of Atlantic Investment Capital, Inc., a full-service commercial lending advisory and brokerage firm. Stewart has been

structuring finance solutions for both commercial real estate investors and business owners since 1996, with products ranging from equipment leases to commercial real estate loans as well as assumption representation and consulting. Atlantic specializes in structuring finance solutions for investment opportunities in commercial real estate nationwide. The company leverages direct relationships with both agency and conduit lenders for permanent loans as well as hedge funds and insurance companies for interim financing. Atlantic also provides equity funding solutions for select properties within the domestic United States. Stewart also provides an advisory platform for commercial real estate investors. It is based on more than two decades of working with clients who are dealing with the challenges of financing commercial real estate acquisitions.

4 :: INVESTOR REVIEW :: NOV-DEC 2022

Filmed on location, Titan Talk is a one-on-one interview between you and Eddie Wilson, CEO of Think Realty and the American Association of Private Lenders. This personal endorsement carries extensive publicity, marketing opportunities, and bragging rights, naming you as the exclusive Titan of your real estate sector for a year.

What’s Included

CONTACT SALES@THINKREALTY.COM FOR MORE INFO!

• A One-on-one, 20-minute video interview by Eddie Wilson filmed on location, with B-roll footage of your office shot for use in the video. • A featured article in Think Realty Magazine and Private Lender magazine, with the article publicized as a preview line item on the magazine cover and highlighted in the corresponding newsletter. • A Titan Talk web page dedicated to you as the exclusive Titan of your real estate sector for 12 months. The page will headline your video interview, profile, featured article, and other articles by you. • Your video interview posted on Eddie Wilson’s personal social media pages and website. • Your video interview posted on the Think Realty Podcast page.

• Six social media posts on Think Realty and AAPL’s Facebook and LinkedIn pages. • Presidents’ Circle membership for one year.

Brought to you by:

9 Questions to Ask Before Buying a Commercial Property The key to investing successfully in any property is in the details, so asking tough questions about your potential investment is essential.

by Luke Babich

6 :: INVESTOR REVIEW :: NOV-DEC 2022

A fter looking at the commer- cial properties in your area, you’ve finally found one that seems to meet your investment criteria. It’s in a great location, the price is right, and you’re already thinking about putting in an offer. But before you take the plunge, you should ask some tough questions. The key to success with any invest - ment property is in the details, so gather all the information you can about your potential investment. Here are nine not-so-obvious ques - tions you’ll want to ask before making an offer on a commercial property.  ARE THERE TENANTS IN PLACE? Even though the commercial market has experienced a significant slowdown, it’s likely that any 1 commercial property you’re buying already has a few tenants in place. Request the rent roll and copies of the current leases from your broker. These documents will tell you who the lessees are, when their leases expire, the terms of those leases (including allowed rent increases), how much rent they pay, and how much they may contribute to common expenses.

Collectively, this is just the cost of doing business—similar to how a seller generally has to pay real estate commission. Combining the income and the expenses should get you a net operating income (NOI), which is what you can expect to pocket each month from the property. Whether you’re planning to buy and hold or resell in a year or two, the NOI allows you to calculate your return on investment (ROI)—making it arguably the single-most important factor in any commercial property decision.

boost customer traffic and increase your profitability, or it could dilute demand and siphon business away from you. Buying a commercial property is a lot riskier than investing in an REIT. Look into commercial building permits that have been recently filed for projects near you and talk to your broker about any new developments in the area, including rumors and possibilities they’ve heard about. Then conduct a careful analysis of the impacts these new projects could have on your property.

 CAN I SEE A PRO FORMA?

2

A pro forma is a complete account- ing of all the income and expenses of a commercial property, so this is vital information. Once you receive copies of the leases, make sure all the rents and fees detailed in the leases add up to the amount of income indicated in the pro forma. If they don’t, ask the broker for clarification. The expenses should include everything the owner pays to maintain and market the property, from trash removal, routine building maintenance, and landscaping to professional property management.

 WHAT OTHER PROJECTS ARE PLANNED FOR THE AREA?

 IS THERE A GROUND LEASE?

3

4

Many commercial properties have a ground lease, which means you’ll pay rent on the ground under the property you buy. There are pros and cons to a ground lease. On the plus side, it can make a commercial property much more affordable since you’re not paying to own the land under the building. On the other hand, you won’t benefit from appreciation on that land either.

Future developments can have a massive impact—positive or negative—on your future profitability. For example, a new highway being built nearby could bring in the commuter crowd, or cut you off from the neighborhood, depending on the placement. An influx of new construction in your area could

INVESTOR REVIEW :: 7

confirm the actual property lines and that you’re going to receive the property you think you’re supposed to. If your property encroaches onto a neighboring lot, even by just a tiny bit, it could introduce serious legal complications down the line. 9 DOES THE PROPERTY HAVE ANY ENVIRONMENTAL ISSUES? To make sure there are no environmental problems that will need to be remediated—which can be a very costly and lengthy process— have a Phase I environmental assessment done. If that doesn’t uncover any issues, you’re in the clear. If it indicates the presence of potential issues, you’ll need a Phase II environmental assessment, which is an in-depth environmental study that closely analyzes the property’s soil, water, and air. If major contamination is found, you’ll need to have a serious conversation with the seller about liability issues and remediation. This could give you significant leverage in the negotiation—the kind of leverage that can get contingencies removed from a contract or lead to a huge price reduction.

purchase. You could put in an offer that’s contingent on receiving a variance or a rezoning, but you can’t count on receiving either. And the variance or rezoning application processes can be long and complicated. 7 IS THE TITLE FREE AND CLEAR? When you’re doing your due diligence, make sure you receive a full title report. This report will detail any liens, claims, restrictions, covenants, or other encumbrances that could complicate your purchase. You’ll want a full Ownership and Encumbrance report before you make your offer.

Additionally, the terms of your ground lease are extremely important—make sure you comb through the lease carefully to find out if it’s renewable and what kind of rent increases are allowed.  WHAT IS THE DEVELOPER’S TRACK RECORD? Don’t underestimate the 5 importance of the developer to a project’s overall profitability. Newer developers can tank a project, even if the property is in a prime location, simply through mistakes of inexperience. Look into the agent’s experience with previous developments in the same sector. If it’s thin or spotty, be careful in your analysis.  IS YOUR INTENDED USE ALLOWED UNDER ZONING RULES? Zoning is as important as location 6 in any analysis of a commercial acquisition. Determine, with the assistance of your broker, whether zoning rules allow for your intended use. If not, this complicates your

8 WHAT ARE THE EXACT PROPERTY LINES?

Getting a property survey is pretty standard, whether you’re selling a home or buying an office building. You’d be surprised how many times an actual survey disagrees with the property lines as described. Make sure the seller has a survey done (you may have to request one) to

Luke Babich is the co-founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers, and investors make smarter

financial decisions. Babich is a licensed real estate agent in Missouri, and his research and insights have been featured on BiggerPockets, Inman, the LA Times, and other media. He received a bachelor’s degree with honors in political science from Stanford University.

8 :: INVESTOR REVIEW :: NOV-DEC 2022

INVESTOR REVIEW :: 9

What’s in Store for Commercial Real Estate

term customers who are not as price sensitive; it is not convenient to move or acceptable to sell/ throw away the storage contents. A $25 per month increase in the rental rate could represent a 15%-20% or larger increase yet still come in well under what tenants are paying for their cable services or cellphones.  There’s high potential for lucrative exit strategies. Self-storage is a very fragmented industry—well over half the facilities are owned by individuals with only one or a few facilities. Yet, as we’ve seen during the past 15 years, they are frequently courted by hedge funds and institutional buyers flush with cash looking to pay high prices for assets that cash flow. This provides an opportunity for the individual investor to buy a facility at great prices in a recession, benefit from the advantages previously discussed, and exit with a great return.  MOBILE HOME PARKS Recessions drive families and businesses to eliminate luxuries and focus on the bare necessities of life (e.g., food, shelter, and clothing, plus payroll in the case of businesses). Those entering a recession with a stronger capital position can hold on longer in their single-family home or large office building (more on this later), but if the recession is long and deep enough, it will cause nearly all individuals to dramatically cut expenses. Mobile home parks have been a consistent performer for decades. They typically don’t respond to the dramatic ups and downs of the economy, making them a stabilizing force in your portfolio during recessions. For housing,

Here are tips for recession-proofing your portfolio and adapting to the post-pandemic workforce.

by Gary Pinkerton

R eal estate investors have experienced meteoric returns in their favorite asset class since real property began its recovery from the devastating global shutdowns mandated in 2020. Whether you’re a buy-and-hold investor, a fix-and-flip professional, or even a private lender, there have been enormous and widespread real estate opportunities in 2021-2022. The questions on investors’ minds today are: 1. What impact will sustained high inflation have on returns? 2. What types of real estate questions from the perspective of commercial real estate, but many of the observations and lessons from history relate just as well to residential real estate and decisions you might need to make about your primary residence as a sustainable financial asset. CONSISTENT PERFORMERS Certain commercial asset classes, notably self-storage facilities and mobile home parks, have consistently are poised to do the best in a recession? We’ll take a look at those

performed well in recessions and are positioned to do so again even in the face of high inflation. For this cycle, certain multifamily assets should be added to the list, a result of underbuilding in the decade following the Great Recession (2008-2018) and again in 2020-2021.  SELF-STORAGE Self-storage is a consistent high performer in periods of downsizing, dislocation, and budget cuts. It was the only publicly traded real estate asset type that had a positive return in 2008. There were several reasons that make it likely to repeat in recessions for decades to come:  Costs can be driven very low. Management, on-site staffing, and security can all largely be automated. Marketing can be inexpensively performed locally because all the customers and your competition are local.  Profit centers can be easily expanded. If the local moving company goes out of business, self-storage companies can expand their retail section for moving supplies and add rental vehicles. Tenants are incredibly sticky. Self- storage tenants tend to be long-

10 :: INVESTOR REVIEW :: NOV-DEC 2022

moving along the “downsizing waterfall” ends in two good options before homelessness or moving in with family: mobile home parks or older, smaller apartments. Many families aren’t ready for, or simply won’t fit in, a small one-bedroom or efficiency apartment and will resist high-density living for a host of reasons. Owning their own home in a subdivision with a yard and some distance to their neighbors for pad rent that is likely lower than their food bill is appealing to many. Like self-storage customers, mobile home

KEY TAKEAWAYS

Commercial real estate’s massive returns of the past year can continue if you prudently recession-proof your portfolio. Self-storage and affordable housing are poised to demonstrate their infamous recession resistance once again.  The way in which you finance your portfolio in a recession can have a serious impact on whether you sustain and grow your wealth.

INVESTOR REVIEW :: 11

park tenants are much less likely to move than an apartment renter. The costs to relocate their home is tens of thousands of dollars more than they can come up with and simply not a prudent use of their money, even if they do have it set aside.  MULTIFAMILY APARTMENTS The current stock of multifamily properties, those often classified as Class B and Class C that focus on working-class tenants and that were built more than 20 years ago, are poised to outperform during the next few years. First, they share many of the same qualities as mobile home parks. They are at the end of the

downsizing chain for families needing to cut back, and they

represent a solution to a basic need for shelter. Although high interest rates have caused many recent apartment purchases to fall out of contract or require the sales price to be renegotiated, the corresponding high inflation has provided offsetting increases in revenue, enabling many buyers to continue, potentially with even higher projected returns. The near total void of housing construction that plagued the United States during the Great Recession a decade ago finally started to be addressed before the pandemic, only to be exacerbated by another construction shutdown in 2020 that created supply shortages and dramatically higher construction costs that still exist today. All of these factors have dissuaded new construction in the multifamily space, keeping occupancy rates near record highs and causing unprecedented demand for the existing stock of multifamily assets. It is hard to imagine this demand lessening even in a recession, where historically the sector has softened

FUNDING IS VITAL TO SUCCESS How efficiently you fund your purchases and operations determines your level of performance and returns—and whether you survive at all in a deep recession. For example,

make it to the other side as well as excitement for new opportunities. Those with large financial reserves fall in the excited camp; those with lean margins are filled with fear. Many who are in the excited camp were there also in 2020 as they entered a period that was uncertain while they enjoyed substantial liquidity. These people had embraced a core practice of those who’ve obtained generational wealth: infinite banking. INFINITE BANKING Infinite banking is storing family emergency funds, business and property operating reserves and

many sponsors of multifamily properties are still using the

techniques that worked well in the 2010s: fund with short-term bridge loans, rehab, assume they can then raise rents, get a higher valuation, and be able to replace expiring temporary financing with a long-term fixed rate loan. That can be an extremely risky business model in a recession where valuations could be lower; further, banks may not lend, even if there is sufficient equity to do so. What is the solution? You must have tremendous staying power. In the world of investing, staying power equals capital. Times of crisis are emotional times for all of us, specifically the fear you may not

capital for your investments in uniquely designed whole life

insurance. This essentially allows you to operate your own family bank. Your dollars earn uninterrupted compound interest in a private, tax- advantaged account achieving several

12 :: INVESTOR REVIEW :: NOV-DEC 2022

So, why isn’t this account mainstream today? For the wealthy, it is. For the rest of us, Wall Street has drowned out everything but its own financial agenda. But now, with the right advisor and knowledgeable company, you too can establish an effective foundation to magnify your real estate gains. The key features are more valuable today than ever before. A real estate investor’s best friend, and worst enemy (especially in recessions) is financing. When credit is good, money is cheap. When credit is bad, money doesn’t exist or is drastically expensive. That caused many bankruptcies in 2009, 2020, and every previous economic correction or financial crisis. The guaranteed financing feature allows an owner to borrow from this account at the rate it is earning. The financing feature is similar to a line of credit. When you make payments to your principal loan balance, you can take another loan at any time—as long as the total balance of the loan does not exceed the total cash value in your account—without any repayment requirement. Start today to grow your war chest. Establish and maintain abundant amounts of liquidity to support months and months of staying power. Then, with a clear mind, sit back with a feeling of abundance and watch for opportunities to prosper.

Despite its many benefits, real estate is not foolproof. There are inherent risks, especially during recessions. That is why the wealthiest individuals in the world have a comprehensive plan consisting of other financial products and strategies that help mitigate these risks and add to their overall growth of wealth. The key features of this asset are privacy, tax-free growth, and guaranteed financing. This complementary asset, infinite banking, is a uniquely designed insurance policy that is offered by a mutual life insurance company. The purpose of this vehicle is to build liquid, immediate wealth that can be utilized right away; it’s a personal banking system without limits and shielded from tax. Sophisticated business owners and investors have used this account as a foundation for their wealth for hundreds of years without fail.

times current bank rates. Those who practice this centuries-old method of capital management find themselves in positions of high liquidity when they encounter revenue shortages and when unique buying opportunities come up. You’re not compelled to put the money earning nothing in the bank to work. It is already at work, compounding at high rates in a tax-advantaged and protected asset. You’re able to use a life insurance company or a traditional bank’s money as a loan with terms and payback schedules you dictate—not the banker. There is no application process to manage and no credit score to evaluate. Given the guarantees within these types of policies, your cash value only goes in one direction—up. Plus, you have a built-in line of credit that collateralizes your cash value and that is accessible when you need it—with terms that fit your situation.

Gary Pinkerton is a wealth strategist, veteran, bestselling author and real estate investor. He’s passionate about freedom, small business, building

wealth, legacy, and reducing taxes. A graduate of the U.S. Naval Academy, he commanded the nuclear attack submarine USS Tucson, was a Pentagon division director for the Joint Chiefs, and a senior ethics professor before retiring as a captain. Pinkerton owns and helps others couple high cash-value life insurance with real estate and alternative investments.

INVESTOR REVIEW :: 13

Don’t Get Locked Out of ROI Unified access solutions reach new heights.

by Aaron Rudenstine

G one are the days of unwieldy key rings and locksmiths on speed dial. Unified access control is an all-in-one solution for property owners and managers to control every point of access throughout a building from one integrated platform. With unified access control, owners and operators can easily manage everyday access points such as gates, elevators, and amenity spaces from any laptop or smartphone.

the gym. Assigning keys, creating replacements, and collecting them when a resident moves out are all logistical pain points that require a lot of time. And these tasks do little to improve ROI—they don’t enhance the resident experience or boost retention rates. What’s more, rudimentary electronic access control systems that don’t integrate with each other aren’t much of an upgrade. At just one property, staff might have to

WHY DO BUILDINGS NEED UNIFIED ACCESS CONTROL? Before unified access control, owners and operators had to spend a lot of time dealing with inefficiencies in old lock-and-key systems. For example, before unified access control, when a new resident moved into a gated property with a gym, that resident needed at least four keys: gate, front door, their apartment door, and

14 :: INVESTOR REVIEW :: NOV-DEC 2022

tenant retention, and creating the opportunity for new revenue streams. UNIFIED ACCESS CONTROL REDUCES PROPERTY MANAGEMENT COSTS. Whether a building is self-managed or managed by a third party, imple- menting unified access control can help cut costs. Overseeing property access is vital to maintain security, but it’s also time-consuming—and time is money. By investing in access control technologies that talk to each other, ownership can streamline and automate the process of coordinating access for residents, visitors, delivery carriers, self-guided tours, and maintenance service providers. Ultimately, a unified access solution eliminates the need for management

juggle entirely separate access systems like intercoms, keypads, and smart locks. Without a unified solution, all of these systems must be managed from separate platforms with unique log-in credentials. For a property with a lot of access points, this is a time-consuming process, and the chances that somebody updates one system and forgets to update another are too high. Fortunately, access control providers have innovated past this problem too. The answer? Using technology so every access control system throughout the property can share data, combining all of those disparate systems into one. In the past, onboarding a resident might have meant cutting an entire ring of

keys or spending hours in separate access control databases, but a unified access control system means that management can onboard a resident with one click. HOW DOES UNIFIED ACCESS CONTROL INCREASE ROI? According to the analyst firm Ovia, 42% of all apartments in the United States will feature smart devices such as smart locks by 2025. So, why are buildings across the country embracing smart technology like unified access control? The reason is simple: Unified property access control positively affects ownership’s bottom line. It increases ROI by reducing property management costs, increasing

INVESTOR REVIEW :: 15

where they can unlock the front door, access locked amenity spaces, and open their apartment door from one simple smartphone app? Today, access control providers hyper-focused on the user experience are partnering with like- minded proptech providers to expand their capabilities. ButterflyMX’s recent integration with RemoteLock is one example of unified access control’s future. By installing the smart video intercom at the front door and enabling integration with RemoteLock, a building can add smart locks throughout the property and connect them with the intercom. As a result, residents don’t have to carry multiple keys or fobs; instead, they control all access points with one mobile app. Installing property access control devices is always a good idea. But building owners and managers will save time and enjoy a greater ROI by opting for a unified access solution, where everything is managed through one user-friendly platform.

to oversee property access 24/7, especially during the third shift. UNIFIED ACCESS CONTROL INCREASES TENANT RETENTION . According to Multifamily Insider, it costs about $4,000 to turn over a tenant, so it’s worth investing in solutions that improve the resident experience and, ultimately, prevent turnover. And a convenient access experience is one of the most valuable amenities a building can offer. Properties with unified access control empower residents to unlock doors and navigate the building seamlessly, usually with just a smartphone. And, since all access control devices are managed within one platform, the chances of an access permission mishap are slim. In other words, residents will always have access specific to their individual needs, with little effort from ownership or management. If there is a last-minute problem, management can solve it easily, even if they’re away from the

property. That’s a vast improvement compared to the time it takes to troubleshoot several individual key card or keypad systems. A unified access control system also gives property managers more time to focus on providing personalized services to residents. Staff who aren’t occupied with copying keys and managing multiple systems can add a human touch to the resident experience. When residents establish a personal connection to a property, they’re more likely to renew their leases. UNIFIED ACCESS CONTROL BOOSTS REVENUE. Unified access control doesn’t just cut down on costs. It opens up entirely new avenues of increased revenue and ROI. According to a Rent.com survey, renters are willing to pay up to $52 more per month for an apartment with smart technology. That extra money is buying security, convenience, and ease of access. Who wouldn’t want to live in a building

Aaron Rudenstine is chief executive officer of ButterflyMX, the leading provider of access control technology for multifamily, commercial, gated

communities, and student housing properties. Rudenstine specializes in building high- performing teams to launch and grow new technology products. He was a co-founder of Citymaps, which was acquired by TripAdvisor in 2016, and he is an investor in reddit, Button, Omaze, HENRY The Dentist, Parallel Wireless, Clear Ballot, Pinata, and FilmRise. Rudenstine is an angel investor, board member, advisor, author, and a results-oriented technology executive with extensive experience at startups, growth-stage, and publicly traded companies. He holds an MBA from Harvard.

16 :: INVESTOR REVIEW :: NOV-DEC 2022

OUR AUDIENCE IS WAITING FOR YOU.

Each week, 1,300+ real estate investment aficionados download our podcast across 16 of the medium’s top platforms. Think Realty Podcast is their source for the latest industry trends, hard-hitting insights and news. Contact us at sales@thinkrealty.com to reach our ever-growing audience now.

Guided By GRITT

At SIG , we are on a mission to Improve Lives Through Real Estate. One of Inc. 500’s top fastest-growing real estate companies in 2020, 2021 and 2022, SIG has made a name in this multi-billion-dollar space. Our tenacious team has masterfully navigated its complexity, opportunity and growth to acquire the right assets, in the right cities, with the right returns for our investors.

SIG operates on the values of GRITT:

We stick with it. We never quit. We get back up when we’re knocked down. There is always one more thing we can do. TENACITY

We stretch. Drive. Push ourselves and our company to the next level. We never settle for less than excellence. GROWTH

One team, one fight. Our team is our strength. We respect everyone’s opinions and support them in their endeavors. RESPECT

We never waiver. We choose the hard right over the easy wrong every time, regardless of the consequence. INTEGRITY

No secrets. We communicate openly and truthfully in all situations. Mistakes are learning opportunities. TRANSPARENCY

We’re resilient, we know what it takes to succeed and we make no attempts to conceal our knowledge — or lack thereof — behind closed doors. Unlike the big-city firms, we offer investors candid insight into our industry, our plan, our process and our potential. As hands-on owners and operators of the facilities we acquire, we enhance each project to its full potential — solving problems creatively, adapting to change resiliently, adding value wherever possible and finding ways to generate maximum returns for our investors. Because of our strength in the market, our team can empathize with the challenges and opportunities facing self-storage owners today, allowing us to craft acquisition deals that uniquely benefit all parties involved.

The Spartan Storage Fund 1 is a $150 million fund that welcomes accredited investors to invest in value-add self storage in key markets throughout the United States.

$150M targeted fund total

60-80 properties

400M targeted in acquisitions

By offering a streamlined approach to investing in self- storage real estate, the Fund offers investors:

Spread Out Risk

Better Exposure to High-Growth Markets

Potential for Higher Returns

With a single investment, you can capture $400 million worth of well-vetted opportunities, reducing investment complexity and increasing the potential for higher returns.

Building on the momentum of our first round of acquisitions, we are on track for multiple closings on underperforming, high-potential facilities this fall. Are You Ready to Invest?

Ready to begin passively investing in self-storage real estate? The Spartan Storage Fund 1 makes it easy for accredited investors to hold a stake in this fast-growing industry.

Visit spartan-investors.com to connect with a member of the SIG Investor Relations (IR) team today.

Stable. Recession Resistant. In Demand. I nflation is at record highs. The S&P 500 has been in flux. Americans fear a looming recession. When the economy looks the way it does today, savvy investors have historically turned to commercial real estate (CRE) as a hard asset class with a lower risk profile and more stabilized returns. But the pandemic — and its subsequent economic impact — significantly altered the landscape of CRE sectors like multifamily, office, retail, hospitality and more, while also exposing existing cracks that That’s why now, more than ever, savvy investors — especially passive, accredited investors — are seeking out alternative real estate categories to position their money. Self-storage real estate is one such investment. have lessened their investment appeal.

Why is self storage appealing for investors? • It’s recession resistant. The self- storage industry has performed well in the last four recessions due to its consistent usage during significant life events — good and bad. • It’s a hedge against inflation. Unlike most classes of real estate, self storage largely utilizes short- term, 30-day leases, giving owners a much shorter time horizon to meet the market in whichever economic condition it’s in. • There’s little government regulation. Evicting a delinquent tenant is far easier in self storage than just about any other real estate asset class. Since nobody resides in self-storage units, there are also fewer building requirements. • There are consistent returns. From 2009 to 2018, self-storage facilities averaged an annual ROI of 16.9% (Source: Colliers International). This number was higher than office, industrial, retail or apartments during that time, and it’s only grown in recent years. • There’s stable occupancy. National self-storage occupancy averaged 91.5% in the first quarter of 2020, and as of the third quarter of 2021, it was averaging 96.5%, according to Yardi.

• There are tax advantages. Investing in self storage unlocks a wealth of tax advantages, including depreciation. Investors can use this non-cash deduction to reduce taxable net income while enjoying all the benefits of a property’s appreciation in market value. According to a StorageCafe survey, 38% of respondents declared themselves to be self-storage users in 2021. That number continues to expand year over year.

Business owners rely on self storage to warehouse

their inventory and service equipment.

When they move, get divorced, downsize, relocate, start a business or experience one of a dozen other life events, families and individuals turn to self storage to meet their short- or long-term needs. With factors relevant in both good and bad economic periods, it’s no wonder that, over the last 15 years, self storage has caught the eye of Wall Street. It won’t be an “alternative” investment for much longer.

• There are barriers to entry. Movements like Not in My

Backyard (NIMBY) have prompted bans on new self-storage facilities in several cities, resulting in a scarcity of supply throughout the country.

The Self-Storage Investment Boom Though self storage has been one of the fastest growing real estate sectors for four decades straight, the vast majority of facilities in the country — roughly 76% — are mom-and-pop-owned and operated. Only in the last 15 years — starting around the time of the Great Recession — have institutional investors begun seeing the opportunity to gobble up these smaller, less sophisticated facilities. Self storage maintained solid occupancy throughout the last four recessions, and the asset class fared incredibly well through the COVID-19 pandemic. In fact, self storage was the least challenged asset class in 2021 based on Real Estate Investment Trust (REIT) returns. With new money pouring in, the self- storage industry has started to modernize, maturate and transition into a more attractive and accessible CRE asset class. So Spartan Investment Group (SIG) decided to strike while the iron was hot. In April 2022, we launched the Spartan Storage Fund 1. Last year, we purchased $265 million in value-add self-storage facilities. Now, our goal is to acquire $400 million in new self- storage assets by the end of 2022.

spartan-investors.com

T he past few years have thrown a few curveballs to commercials real estate investors, to say the least. If you’ve kept your eye on the ball, however, you likely have seized the opportunity to buy cash-flowing assets at a decent price and been able to benefit from inflationary rents and historically low interest rates. On the other hand, you may have been caught in the crosshairs of NIMBYISM and government control, hindering your ability to effectively run your property. Or, you may have not taken any action, and now you’re trying to figure out what to do and when.

How Risk Shapes Your Investment Thesis When you understand how to evaluate risk, you can form, test, and reform your investment thesis.

by Logan Freeman

22 :: INVESTOR REVIEW :: NOV-DEC 2022

UNDERSTANDING RISK Let’s address the most important factor: risk. What is risk? Risk can be defined as a situation involving exposure to danger. Sam Zell, a legendary real estate investor said: “Risk is the ultimate differentiator. I have always had a deep and complex relationship with it. I am not a reckless person, but taking risks is really the only way to consistently achieve above-average returns—in life as well as in investments.” It is our job to understand the risks for each project we are pursuing and do the best we can to quantify it, plan for it, and eliminate it. That’s what our investors expect and, frankly, what they deserve. If you are investing solo, you had better understand how to work through the risks of each market, project, and business plan implementation. Risk is one of the most misunderstood aspects of a deal. It can be considered anything that is unknown or not a part of the plan; however, saying something is high risk is often incorrect. For example, a risk with a high likelihood of occurrence but a small impact may be completely acceptable. On the other hand, a risk with a medium likelihood of occurrence and high impact may be completely unacceptable. Here’s a model for risk from real estate pro Victor Menasce that can be extremely helpful . FTW’s risk management plan represents these risk types:

Risk is one of the most misunderstood aspects of a deal.

How do you manage risk properly? • Enumerate the potential risks. • Qualify the risks (time, feasibility, cost, quality). • Determine the likelihood. • Quantify the impact if the risk comes true. • Develop contingency plans for the risks with the higher impacts. Some of the risks in the market are inflated asset values and a rapidly changing debt environment that will not support these prices. The rapid pace of inflation and interest rate increases creates macro risks that influence the debt markets, making it more difficult to mitigate debt risk on projects. Many recent acquisitions in the marketplace over the last 12-24 months have been secured with short-term, floating-rate debt. This has been the way many value-add sponsors have secured capital that aligns with their strategy and the prices they have been paying for these assets. However, the volatility in short-term rates creates an extreme, exponential risk profile for using unhedged, floating rate debt in the current environment.

Additionally, the cost of buying a “cap” on interest rates for these loans has become extremely expensive, and the interest rate caps one can secure still leave you exposed because these caps are even much higher than we would deem desirable. Sam Zell notes: “Opportunity is very often embedded in the imbalance between supply and demand. It could be rising demand against flat or diminishing supply or flat demand against shrinking supply. At some point, those two lines are going to intersect, and when they do, people will make money.” WHAT IS YOUR INVESTMENT THESIS? FTW implements a multi - disciplinary approach using a latticework of nonbusiness mental models to assess risk internally at the specific investment level and externally from a macroeconomic approach. We then measure said risk against perceived benefits and value creation to make investment decisions. Typically, we are looking

• Feasibility • Time delay

• One-time financial cost • Recurring financial cost • Quality

for assets that are well below replacement cost, creating a margin of safety for investors.

INVESTOR REVIEW :: 23

We are still bullish on multifamily, affordable housing, and residential projects when they are priced correctly, and we are buying with a margin of safety (hard to find). We are still bullish on the property type due to a supply/demand imbalance with users and physical spaces (i.e., there is not enough housing to satisfy the number of housing units demanded). Rising demand against a supply that is growing less quickly and not nearly at a rate to absorb that demand should push rental rates higher. However, the capital demand for these properties is also at a historical all-time high, pushing asset prices through the roof. Although many justify overpaying for these assets because of the physical supply/demand imbalance, the rate at which the capital markets have pursued these assets has pushed values too high to take advantage of the physical supply/demand imbalance. At the prices investors are willing to pay for multifamily, the financial risk involved outweighs the

opportunity to exploit the physical supply/demand imbalance. In other words, at these prices, the risks often outweigh the returns. We are tracking the Green Street Property Price Index, and although prices seem to have flattened and

even declined slightly, they are still at levels that are much higher than the pre-pandemic levels we were accustomed to. While we will continue to evaluate on-market and off-market multifamily properties for acquisition, the

The Green Street Commercial Property Price Index ® declined by 1.2% in May. The all-property index is now down 1% since the start of the year. PRICES SLIP FROM HIGHS

24 :: INVESTOR REVIEW :: NOV-DEC 2022

opportunity to buy these properties at the right price are fewer and farther between than any time in recent years. We have the most success identifying distressed properties we are well- equipped to manage. These properties can generate the high risk-adjusted returns we require. With that said, we have continued our efforts to analyze data and trends, as well as pair that with anecdotal and qualitative data we receive on a regular basis to create investment opportunities we feel will generate exceptional risk-adjusted returns. As we evaluate the real estate market as a whole, and especially other property types and sectors, we notice other supply/demand imbalances that are riper for the picking than multifamily is today. The areas where we are especially interested today are in neighborhood retail, neighborhood office, well- located Class A office, and flex industrial properties. Why are each of these compelling to us at this time? We have data and anecdotal evidence to support that on the physical supply/demand side, we have stronger physical demand than is largely believed to exist standing against a flat or flattening supply. On the capital markets side, these

properties are trading at spreads above their historical cap rates. What this means is these properties are performing better physically than the market believes; yet the capital markets, due to some foundational misunderstanding about these properties, are not highly demanding these properties, bringing asset prices to historical lows. If you believe capital demand for these assets will come back once these assets have a longer time to prove their resilience and necessity in the physical marketplace, as we do, then now is the time to acquire these properties at a discounted price and be in a position to sell back into a higher capital demand (thus, higher priced) market. Although the majority of our strategy focuses on value-add and core plus assets, we have also identified opportunities for ground-up development where there are unique and profound supply demand imbalances. These can be found in particular markets and submarkets today in multifamily, build-to-rent (BTR), and industrial where new Class A properties are often selling for well above completion costs. We will pursue opportunities in these strategies with the right partners at the right time

as they become available; however, we do principally believe the majority of ours and our investors’ portfolios are better off in the value-add and core-plus strategies. When you can start with evaluating risk, your investment thesis can be formed, tested, and reformed. It seems these days, you need to be testing more often than not.

Logan Freeman brings over five years of real estate experience to the team. He started his real estate career with a single-family rental

portfolio where he executed over $50 million in acquisitions. From there, he moved to Clemons Real Estate where he was the leading salesperson year over year as he created, lead, and executed a unique strategy for representing buyers in 1031 transactions. Freeman oversees the Investor Relations and Marketing Divisions at FTW Investments and contributes heavily to its project sourcing and capital raising efforts. He leads XchangeCRE, an affiliate of the firm that assists 1031 exchange investors in identifying replacement properties and other tax-advantaged reinvestment strategies, including TIC investments with FTW Investments. He leverages his people skills and transaction background to drive new acquisitions, capital raising, and investor relations. Freeman is a voting member of the firm’s investment committee..

INVESTOR REVIEW :: 25

Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12 Page 13 Page 14 Page 15 Page 16 Page 17 Page 18 Page 19 Page 20 Page 21 Page 22 Page 23 Page 24 Page 25 Page 26 Page 27 Page 28 Page 29 Page 30 Page 31 Page 32 Page 33 Page 34 Page 35 Page 36 Page 37 Page 38 Page 39 Page 40

Made with FlippingBook Online newsletter