The Capital Stack
30-unit Private Entry Apartment Community
Piney Grove Townhomes
Piney Grove townhomes is a 30-unit apartment community located in growing northwest Columbia SC. This property abides by an important principle rule we always try to follow when buying real estate. The rule is to purchase properties in growing locations and below replacement cost. Costco and Starbucks have just expanded to this area, building new locations in 2016 (Costco) and 2021 (Starbucks). We purchased the townhomes under replacement cost at $80 per square foot. Assets in this immediate area are trading at $90+ per foot in similar condition.
How We Found Piney Grove
Piney Grove is JV syndication deal consisting of myself and two partners. I connected with these investors who are now my partners on Piney Grove through a multifamily specific Facebook group. At the time we connected they had many questions pertaining to the syndication process. We reviewed the syndication process through a few different conference calls and eventually ended up meeting for lunch. A mutual camaraderie was established, and we talked about the possibility of purchasing a deal in the near future. We analyzed a few deals together in the Tucson Arizona area, but the numbers did not line up. Shortly after a few failed attempts I received a call from the partner who is living in South Carolina. He expressed that they were very close to having a signed contract on Piney Grove. They asked if I would lead the deal so they could learn the syndication process. They plan to copy and paste the information learned on many deals in the future.
Piney Grove is one of the only deals we purchased that was listed on the open market. It was listed by Marcus and Millichap. Our broker happened to have a working relationship with the listing broker which helped us win a very competitive bidding process.
Our Business Plan
Piney Grove Townhomes is a C class asset in a B location. The location along with the below market rents make Piney Grove perfect for repositioning. At the time we purchased the property rents were ~25% below market rate. The current owner was receiving an average rent of $1015 per month. Our underwriting and market analysis showed that with a renovated unit we could easily achieve a monthly rent of $1400. In order to achieve this rent we plan to make significant physical improvements to the property. The physical improvements include repairing deferred maintenance and renovating 100% of unit interiors. We will also update the exterior with a new modern color scheme. We anticipate this to cost $10,000 per unit on interior upgrades and $134,000 on exterior updates and common deferred maintenance. We project that 100% of exterior renovations will be completed within 6 months of purchasing the asset and anticipate the interior renovations will take 12-16 months to complete. We plan to complete all interior renovations as leases expire.
How it’s Going Today
Since closing in November of 2022 we were able to lease our first turned unit and exceed our target rent by leasing for $1479. We are in the process of leasing a second turned unit. The renovations are moving along on schedule. Most of the exterior deferred maintenance will be addressed once the weather turns as well as the painting of the building and updating the landscaping.
The Capital Stack
We purchased Piney Grove for $3,360,000. The total loan amount we received is $3,035,200 this includes the renovations budget of $434,000. This loan has a 4.25% interest rate with the first 18 months of payments being interest only. The amortization period is 25 years. There is a 5-year total term with balloon payment due at end of 5 years. There is a 1% loan fee. We raised $1,100,000 of equity and have 31 investors on this project. On the equity side we partnered with one other company who solely raises funds for deals so in total there are three of us as Sponsors on the GP side of the deal.
Major Market News
|Disney and Real Estate According to The Real Deal “Disney plans to return to residential real estate”. Disney is planning to develop a residential community in Rancho Mirage, California which is near Palm Springs. It is being developed in collaboration with Scottsdale based DMB Development and expected to include estates, single family homes, and condominiums surrounding a 24 acre lagoon. Disney has been developing residential real estate for a while and notably in the 1990s with a 5,000 acre community known as Celebration which is near Walt Disney World in Orlando which they have now sold most of their interest in. |
|Tips and Tricks|
|Check out some popular real estate terms:|
Turned unit: A turned unit is one that has been freshened up and ready for a new tenant. This ranges from a quick turn where we will clean the entire unit, fix any damages, and it’ll be rent ready, to a heavy turn. A heavy turn is what we are typically doing in the first year or two of owning a property as the prior owner did not renovate to our full scope. A heavy turn will consist of new flooring, fixtures, counters, cabinets, paint, and sometimes doors and trim also.
Target rent: This is the rental amount we are shooting for when we turn a unit. This is one of the more speculative parts of real estate as we don’t know for certain what the unit will rent for until we put it on the market. We have been fortunate recently with rental market conditions that most of the time we exceed or initial target rent.
Loan Fee: This is the fee that a lender will charge for writing a loan. Think of it as a commission. This typically ranges from 0.5% to 1.5% of the total loan amount.
Balloon: This is the amount remaining on the balance of the loan at the end of the term. This is all due in one lump sum on the final day. Most commercial loans will be a 3, 5, 7, or 10 year term with a balloon. In order to come up with the funds to pay for this amount we will typically refinance or sell prior to the due date so that the initial loan can be paid off. If we refinance then we are taking out a new loan at a larger amount and the timeline starts over again. Most refinance loans will be a 5, 10, or 20 year term.
Example: A 3 year term loan for $1,000,000 at 4% interest only with a 1% fee. We pay the 1% or $10,000 fee on closing day. Then we pay $40,000 annually as interest. Then at the end of 3 years we owe all of the $1,000,000 at one time. The bank would make a total of $130,000 profit on this loan. We would typically refinance a year before this due date to avoid trouble and owing more than the property can afford to pay back.