Lake Forest Syndication Overview Video

Hey, Flip and Danny here. What's up? We are launching our very first large apartment syndication opportunity for our investors. And we're super, super excited, so excited that we're doing this on our anniversary trip. What number is it?

17.

Oh, he got lucky. We are in Nashville at a Airbnb for our anniversary, and we're recording this. So that's why you see this fun little background here, because we set it up in front of the kitchen. All right, so we felt like recording this overview of the property would be the best way to get the first pieces of information to everyone. We're going to follow up later this week with a live Q and A. This should give everybody watching the opportunity to think of any questions you have, and then we're going to answer them all at once. If you can't attend the live Q and A for whatever reason, you can email us your questions. And we're going to record the session and send it out to everybody for review. So let's jump right in. Today we're going to be talking about our newest acquisition, Lake Forest, that we've partnered with Integrity Holding Group on. It's a little bit different than a traditional acquisition. Typically, when we purchase a property, we do all the due diligence, and we'll fly out and see the property, and then we get a psa, which is a purchase sale agreement, and then we capitalize the property and do a full sale. This is a little bit different than one that we've done before. It's because this is a recapitalization of an existing deal. So recapitalizations happen because one of two reasons. One, either the limited partner, who typically is a real estate investment trust or private equity fund, needs to recapitalize their balance sheet. They need to take money out of projects. Or an operator who went out and found a great deal, bought it with his own cash, and then he's bringing in limited partners after the fact that. So what I love about this deal is you have an institutional sponsor, which means that historically, the sponsor that is on this deal has been operating this project for 18 months already. He owns it, he operates it, and he's typically been funded by Wall street, specifically real estate investment trusts.

So Chris Finley is the owner of Lloyd Jones Capital, and our partner Stephen met him about seven years ago at a Harvard Club breakfast in Manhattan. And they have stayed in touch. And Chris loves the fact that we give higher than normal return returns to our investors by cutting out the Wall street private equity funds. So it's interesting to see a Guy who's been working with Wall street for 40 years say, you know, I'd rather work with you guys. So it gives us an opportunity to buy an institutional level asset with an institutional quality sponsor who has already owned the property for almost two years now. And the reason that's important is when you're looking at deals like this, you have a lot of projections that are taking place and a lot of Performa numbers. And even though we've achieved or beat those performance in the past, what I love about this is the management team is in place and they've already proven out their model meeting the upside that we're looking to see over the next couple years, they're already achieving it in about 50% of the 384 units.

Yes. So you nailed it. Let's dive in. So Daytona beach, the name of the complex is Lake Free forest. It's a 384 unit apartment complex complex in Daytona Beach, Florida in a class B area. We like class B and class C areas. You guys already know that because many of you have been investing with us for a very long time. This is a great market. All the new construction stuff that comes online right now is Class A. That's how you're going to kind of determine the class differences. It doesn't make a lot of sense to try to get middle of the road rents when you have to pay the highest construction costs for class A buildings, which is what you see coming out of the ground. So what I like about this is we're purchasing this building building for under replacement costs. We couldn't build it for what the costs are today. And we can still compete with those class A type of properties because typically they're coming out of the ground with smaller unit sizes. We have larger unit sizes and we have the ability to increase the value of the property by doing Interior Rent SA.

So 384 units. Like Danny said, it's class B. And here's what I like about the sponsor. So Lloyd Jones Capital has been in Daytona beach for about 15 years now. They own three other assets in the market and they've been operating this deal for, like we said, almost two years now. Now Daytona is becoming increasingly a commuter city for Orlando. So the Orlando MSA is increasingly seeing daily commut into Daytona Beach. It's only about an hour and 20 minutes away because of the proximity. So you're Also on the i95 corridor, the tourist corridor there. And so they're seeing job growth, income growth, commuter growth. And in 2017, this particular area was the fourth largest, fastest growing MSA in the country. So it still experienced explosive growth. I mean Florida in general. Right. If some of us are from the Northeast or from California or the Midwest, I mean especially during February, you know, everyone is making a mass exodus to populations and they're changing where they're living. They're typically going to, well, Texas or Florida, both non income state income tax states too.

Yes, good point.

So there's a lot of different economic drivers down there. There's, oh, there happens to be five flight schools in Daytona right there next to Cape Canaveral, which I also found interesting. And so Lloyd Jones has actually come out of the ground doing development projects for 3, 300 plus units. Low income housing tax credit deals that they've already developed. They still own one of those. They own three other assets in this market nearing almost a thousand units.

That's awesome. So what I like about that is they understand the market intimately and what they can get back from Capex returns. So when they're going out and saying, hey, we're going to put in this much money per unit and this is what we can achieve, they are the ones setting the bar in that market. They are the ones setting the precedent in that market for what they can achieve. So again, when it comes down to performa numbers and we're looking at this in a Covid environment saying where's the least amount of risk? Where are we going to make sure that we see things that are already operational and we don't have to guess about it? That's a big key for us as well. And then Stuart, who's actually the guy at Lloyd Jones who runs the day to day, he's the senior property manager there. Before Stuart ran this property for Lloyd Jones back in 2012, 2013, he did the reposition for another company with another asset management team. So he's been on this property since 2012, 2013 and he knows this property very well and what the issues have been and how to fix them. So we're really excited that he's that familiar with this asset.

Yeah, you'd have to really know a lot about that property for almost 10 years now.

Yeah.

So the previous owners who owned the building before Lloyd Jones did, they came in and they had an interesting problem with occupancy. So they were only at about 80 to 85% occupancy when they purchased it. So what they did was seriously the kiss of death in property management, which is lower the entry point and stop checking credit and criminal histories. So the rents Were lowered and so that they could get an increased occupancy. But that just doesn't speak to the health and the longevity of the asset. Right. That might help you in the. In the short term, but it didn't help them in the long term. So they ended up selling it to Lloyd Jones, who purchased it two years ago. And in the last two years, they've gone through a couple of things. Number one is they had some crime because of the previous background checks or lack of background checks. So that's some crime that they had to get rid of. And they actually turned about 80% of the tenant base because the tenants just weren't there, or they were late payers or slow payers, you know, or had some criminal history or something to that effect. So that's another reason I really like this deal, because we have historically gone into deals like this and said, okay, so that's the value. Right. We can turn these tenants. Well, in a Covid environment, that's a very dangerous premise. The president right now is kicking out eviction moratoriums every 30 days for another 90 days. I think right now we're backed into July. So to do these heavy lifts or do these tenant turns in a Covid environment, I think just adds too much risk to a deal. So this has already been done. And right now they're at 97% economic occupancy and 97% physical occupancy, which means that there's very little delinquency, if any. And that's really a big deal for what we're looking for in terms of stabilized cash flow.

Yeah. So 80% of the turnover of the tenant base in 2020, they got it to 92 to 93% economic and physical occupancy, which is huge. Then Covid hit, so they kind of had to do almost another reposition in Covid, because what they did was they looked at all of their tenant base to discover where are the hospitality industry people, where are the retail industry tenants? Because you could find them pretty easy. They're not paying, they're not working. And then they had to do a separate turn for those tenants. So now they're leaning more towards office type tenants that are working from home. There's only nine current evictions and no delinquency outside of that. So, you know, just given the environment of multifamily, right now, those numbers are super strong for the markets that they're in. So that's what I like about it. The heavy lift has already been done. There's Effective management already in place and they've turned the tenant base. So what are we going to do to the property when we go in? Well, we're going to go in, we're going to replace about 70 air conditioning units that have not been replaced yet. The other 314 have been. And we're doing a fitness center build out. It's going to be about a six figure build out of an existing exterior building and it's going to be crossfit centric. They're going to do a cardio room, kind of like a theater room, you know where you go to the gym and you see that wall of different TVs and stuff with all the cardio equipment in front of it. We're going to build that out as well and that's really going to be state of the art. That's going to separate us amenity wise. We're going to have two pools and this fitness center. I think it's really going to set us apart because even the new class A buildings that are coming out of the ground, they don't have a separate fitness facility on site. If they do, the current market rents are going for between 5 to 700 more per month than what we're asking for at ours. So we're going to have a more feature rich amenity class with larger units with very nice interior and exterior upgrades, but for about five to seven hundred dollars less than the competition. So that's how we tend to continue staying at 97 to 100% occupied.

I think we need to go visit. So and then in terms of how much interest is this property getting? Right. Well, we're looking at about 30 applications a month with about 24 to 25 getting approved. So that's about 75 to 80% approvals on what is coming in. And we asked for three months of income against, against. The rent gets what the rent will be. And so then we're also doing the criminal, the credit and the background checks. So that is kind of the rundown from the asset management side of things. And then I'll just open this PDF up of the property. Now, this PDF, which should be attached to the same email that you receive this video. And so we'll just go through this quickly. So number one, there's risks involved with investing in real estate. I'm pretty sure everybody that's watching this understands that this is where the legal ease is that says so. Now the third page is about our investment purpose and one of the many reasons we are so proud to be partnering with Integrity Holdings Group on future syndications. You'll start seeing that this is a big piece of the business where we like to carve out a piece of the deal for nonprofit or multiple nonprofits as this case will be. Now this project is a $41.25 million project. So lots more cash flow, lots more people to help. So we're very excited. We have not chosen the nonprofits yet and I know that that will be a coming question. But once we do, we will let you know and we'll send that out prior to closing. And then this is just kind of talking about the area of Daytona, why we like it. Here's the growth plan, here's the exterior and interior improvements. We can get detailed into this stuff, but I'm not going to spend a lot of time with you guys on it, but feel free to write down any questions. So if we have. Sorry. So we have 13 buildings. It's on 22 acres. We're buying it for about $107,000 a unit which is going about going 6% capitalization rate. The average in Daytona is like $125,000 a unit. So we're a little bit under basis and then we also have a good going in cap rate. Just really strong cash flow that's existed.

Yeah. So you're going to see required capital from investors here. We're going to be taking that into our total acquisitions costs which will be about 43 million. And then the mortgage info, we already have 27,750,000 as a first mortgage balance. And then there's a mezzanine piece which is kind of like a second loan position that Fannie Mae did at a 10 year interest at 7.83%. So you'll see a blended loan to value at just about 7, 75%. We have about 25% equity in the property, which is typically our leverage point. Sometimes we'll go as high as 80%, but anywhere between 65 and 80% loan to value is where we like to be. So we're going to be raising 11.7 million for this project. The sponsors, ourselves and our partner are going to be leaving in just about a million dollars ourselves. So our five year performa and budget basically total scheduled gross income and total rental income. The reason that you're going to see a disparity here is gross income includes your late fe, include your pet fees, include some of that non scheduled rental income because there's other income on the property. So your effective gross incomes will be here. Your totaling expenses will be Here, your net operating income here, which is really what drives the value of these properties. They're all listed out here. And then our reserves, debt service, and then free cash flow. So as you can see, very strong cash flow, very strong net operating income right out of the gate. And we have a five year plan to increase that rental income.

So the plan to do that, by the way, is not only doing amenity, rich environment that we're doing, but also right now Lloyd Jones has already done about 47% of the units where they have gone in and they have installed washer and dryers into the units. Now, the ductwork and plumbing was already there. The previous ownership pulled them all out while we are putting them all back in. And we're seeing an immediate $45 a month rental premium on those units. Now what we like about it is half of them have already been. So we're not guessing. We already know exactly what the rental premium is going to be when we finish out the rest of those units. Okay, so the cash flow model, this is your bucket right here at the bottom. And then this lays out what the equity and expenses are. So this is taken from the previous page. The net operating income, the yield to equity is the 6% return that we talked about on the equity and then the debt service and then our reserves. And then this is free cash flow. So that means after the investor is yield guys have been paid, after the reserves have been done, after the debt service has been done, we still have free cash flow. Nearing this. And then this debt service coverage ratio is always a big deal because we want to make sure that we're not underwriting to anything under 1.25%, meaning you have 125% of cash flow over what your mortgage is. You want to make sure that you have insulation between us and the mortgage. So if you have months, when you have serious delinquency or vacancy or non payers or we want a 25% buffer from what the debt service needs to be to what we want to be. So that's our minimum. You see, this is much stronger than that. 1.57 in year one, 1.61 in year two.

Right. So annual cash flow projected for you as the investor on a $100,000 investment, we do a 6% preferred return. Our limited partners are in preferred position, meaning we eat last, you guys eat first. So 6% preferred return on your initial investment. We're going to make quarterly payments on this project. So you'll see 6% per year for the whole time. And Then let's say we sell in year five. You'll see that accrued 6% preferred return on the exit. Right. So effectively a 12% per annum return in a preferred position, meaning you guys get paid first and then also 50% of the tax benefit is shared to the limited partners, which is you guys. So we're going to do a cost segregation study on this deal. Historically we get about 30% of the value of the property in depreciation. So without making any promises, you know, we're going to be looking at somewhere between 10 and 15 million dollars in depreciable write offs this year for this particular project, which is really exciting. So here's lots of photos, bunch of different floor plans. We do have a waiting list on four of them. The bigger ones are the ones that have the waiting list. So at 97% occupied, that's great news. And then just some highlights of Daytona beach, the demographics, why do we like it? Some aerial photos as well as the management team, which involves us, our partners at Integrity Holdings Group and Chris Finley, who's the owner of Lloyd Jones Capital. And then this is just some of the data sheets on Lloyd Jones, so feel free to go over this by yourselves. He's got 40 years experience, he's an institutional grade sponsor. You guys are going to love the updates that we get from them on a monthly basis. And if you're like me, you're going to want the simple one page, kind of boiled down version that we'll add to the investor portal every month to tell you what the occupancy looks like, what the vacancy looks like, what CapEx budgets we have done. But we'll also attach the 153 page report that you can dig through if you so choose. And then here's the legal and accounting teams. Do yourself a favor, just Google these folks if you're looking for decent accountants that have a lot of, a lot of experience. And then here's just our portfolio of assets.

Okay, so now a few things before we close this video out and get it sent off to you, there are some important things you need to know for this particular investor opportunity. Number one, this is for accredited investors only. That includes one, a person that must have an annual income exceeding $200,000, $300,000 for joint income for the last two years with the expectation of earning the same or a higher income in the current year. Number two. Or a person is also considered an accredited investor if they have a net worth exceeding $1 million either individually or jointly with their spouse. Now there are more extensive criteria to being an accredited investor that will be listed on this email that this video was sent in.

That's right. So the next thing we want to make sure that you know is that there is a minimum investment of $100,000. The maximum investment isn't set in stone. It depends on the investor's liquidity. But it's likely going to be around 20 to 25% of our raise, which is 11.7 million, which comes out to around $2.33 million. If you have any questions about that, feel free to ask. And as a reminder, because we went fairly fast on the returns, it is combined about 12%. You're also going to get the depreciation, the tax benefits from that. So it's divided between a 6% return from the cash flow that you're paid out quarterly and then the 6% of equity that you have is accrued until we sell. And that's when you get that, that investment back plus the interest. So, number three, thing that we wanted you to know is our hold time for projects like these are typically five to seven years. So we're going to look at five. That's probably going to be the sweet spot on this deal. But if we're killing it and crushing it, getting a lot of great cash flow off of it, maybe we'll just keep on going to seven. Lloyd Jones historically has averaged about five and a half years on their holds, so we're already two years into that, but the recapitalization will probably kick that out another two years. So seven for them total, but probably five for us.

So number four, we will start taking commitments now. So if you want to jump on a call with one of us, just use Danny's calendar link. We'll also be sending out the invite for our live Q and A call this week, and we will record that, too, in order to help everyone's questions get answered all at once. Now, March 31 is the goal to close on this property, which means we'll start taking in money about two weeks before that. And then we'll get all of the subscription agreements and legal paperwork out to you guys. We'll probably do a video or something where we will walk through what all of that will look like.

That's right. So that should cover our overview of the project for now. Thank you so much for taking the time to watch it. Start writing down your questions as they come to you, and then join us for the Q and A call. I'm just waiting for our partner, Steven, to let me know his availability and then we'll start getting that scheduled. Or feel free to email us your questions. So I've already got quite a few emails and I've started kind of a document of everybody's questions so that I can combine the ones that are similar and we can just make sure that we're getting all of those answers answered as well. And we're going to send you that recording reach out anytime. You are never bothering us. All of our.

Not even on vacation.

Yeah, yeah. All of our investors that work with us on, you know, private money lending or investor shares like we're doing now here with syndications, you guys deal directly with us, the owners of the company. And so we don't, we don't even want you to deal with anybody else. So don't be afraid. Get us. My calendar does get full from time to time. Taylor is my assistant. She can always help squeeze you in somewhere if you don't see calendar availability. So just reach out to her. We want to make sure that you feel really comfortable. We want to make sure that you have all the information that you need to be able to make an educated decision on everything that we're getting into and the opportunities we're going to be bringing to you guys. Thank you again for watching this and we'll talk to you again soon. Bye.

Bye.