Investing

We are increasingly looking at value property investments on an all-cash or very low loan-to-value basis in focusing on small to medium sized value-add apartment and commercial properties in the $2-25M million range.

The mortgage rates in this size range are automatically higher because it is less cost-efficient/effective for mortgage lenders to make these loans because they take the same amount of work and cost. Further, in the case of apartments, the lowest rate loans are determined based on in-place cash flow when a property is stabilized.

But what loan options are there for value-add properties with little to no income in place? The only loan options here are very high rate bridges that put a time clock on completing the value-add plan. This effectively adds risk and costs to your plan during a time period when execution is a lot uncertain.

The opportunity today is to assemble a nimble, but strong, pool of capital to target near-term property dislocation and rates environment and sell/refinance into medium-term strength. If you can capitalize near-term dislocations and refinance them into medium-term strength, it behooves capital to stay in and ride compounded rent appreciation over the long-term horizon (5-10 years+).

We’re currently seeing lower returns for value-add opportunities, where we would be needing to take more risk, in comparison to higher returns for stabilized properties. This is due to there being so much demand for creating value in apartments in Los Angeles.

Properties are getting priced to lower returns than finished, fully occupied and fully leased properties are. We just came across this in securing a high value-add property next door to a brand new property. Both of them were up for sale. We did the financial analysis for both and concluded that the completed, stabilized property had a higher return at a lower risk, compared to the value-add property.

By the time you would have spent all of the money on renovation costs, the value-add property became the same price as the brand new building next door, which is already generating a higher return, for lower risk.

This is the dislocation right now in LA apartment investing.

One of the value propositions to private investors who we work with is that we’ve worked with institutional investors. We have the experience and processes to work on large-scale projects to bring into small-scale projects.

Everything from acting as a fiduciary, running efficient management, doing very-high level accounting, strategic asset and property management and leasing. Everything is driven by value-creation, but brought down to a smaller and medium-sized scale for private investors.

Tax implications – Institutional investors are usually tax-free because they are pension funds and don’t get taxed. Private investors do have tax implications and so what we push forward is what we call ‘Risk-Adjusted Returns After Tax’ (RAAT). Meaning we are not only delivering high property investment returns but we are also able to take advantage of the different tax strategies that are specifically available for real estate including: costs aggregation, depreciation, as well as bonus depreciation, opportunity zone investing and cash-out re-financing.

Alignment – The reason why I like to invest with private investors is the ability to have more alignment to do more for the investor, more for the asset, and more for the community. With a pension fund managed by another entity, an investor receives their return on investment in their e-trade account. I like to be able to provide the flow of energy in the form of sending the investor their return on their investment, visibly as a cheque in the mail.

Flexibility – You can also structure more flexibility with private investors to align on the property business plan. This allows you to add value in multiple phases and to hold the property longer. In comparison, with institutional investors you are typically stuck to a 3-5 year business plan. They need to get in and out. This leaves a lot of meat on the bone in terms of what you can do to the property, as well as leaving the community hanging a lot of times.

As an emerging investment manager going into Q1 2020, we were in the process of building and scaling our assets under management or “AUM” with our next investment. This was a very unique event-driven opportunity where we had the opportunity to pre-lease a large vacant building to a blue chip office tenant in conjunction with buying it.

We opted not to move forward with a $95M acquisition/redevelopment that was scheduled to close in April 2020. This protected our investors from a steep, near-term decline in value despite having worked on this project for over 6 months and having incurred over $200,000 in pursuit costs.

As stewards of capital to our investors, and with complete respect and transparency to the Seller and their broker’s need to preserve the property value, hitting the pause button and stepping aside was the right thing to do…as painful as it was.

As fiduciaries to our investors, it boils down to protecting and preserving investors at all costs, even if that means it comes out of your own pocket as the sponsor.

Event-Driven Distressed & Special Situations: We sometimes find opportunities driven by events that enable us to see more value and/or factor other discounts into the price of a property. This can happen when a seller or its lender needs to sell a property quickly at a market-clearing price due to extenuating circumstances such as financial distress. Alternatively, a special situation could result if we can align with a tenant to lease a property in advance of buying it.

Further, in special situations, we also look to structure joint ventures with property owners to bring the necessary capital and execution services to both preserve and create additional value. We also joint venture with institutional investment funds on larger $30M+ projects that are “event-driven”.

Alongside Market Dislocations, another form of dislocation we like to invest in are Property Dislocations. This is when we can identify risk mis-pricing or uncover hidden value at the property level that is not apparent to the market, competing buyers and the seller. We also look for dislocations by unlocking embedded value through repositioning, repurposing spaces, adding square footage and land re-entitlement.

For example, a cash flowing apartment property with a vacant ground-floor commercial space can lead to an attractive price after factoring the added risk (or discount). How do we get comfortable with the additional commercial risk for this opportunity to be attractive? First, we evaluate the commercial space, as-is, to determine how we can release it with the least amount of cost and risk. This involves looking at any necessary renovation costs, tenant improvements/concessions, leasing commissions and downtime to lease it as retail, office or both. We can then look at both the design and permitting feasibility of repurposing the space to alternative uses such as live-work housing, medical office etc should they yield higher income yield in relation to the additional cost and risk.

The more ways you can feasibly reposition a space, the less risk there is associated with it, assuming the cost is factored into the price. If we can do so feasibly at an acceptable price to the seller, then we have found value potential invisible to others, which is our mantra at BrandView.

We focus on small to medium-sized value-add multifamily and commercial mixed-use projects between $2-30 million dollars through our Fund I and syndication vehicles.

Market Dislocations – We look for mispricing of risk in opportunities across (i) regional markets in Southern CA and (ii) property types and (iii) neighborhood micro-markets. This is amplified by focusing on fragmented small balance “mom & pop“ and middle-market deal size.

For example, the urban exodus is one example of a potential market dislocation that could lead to mispriced assets that could enable purchase and delivery of more affordable housing.