Asset Class Multifamily
No. of Units 78
Total Investment $3,884,550
Price / Unit $49,801
Ave. Gross Annual Rent / Unit $10,264
Location Portsmouth, VA
Projected IRR 29% – 35%
Projected Multiple 1.8X
Estimated Hold Period 4 Years
Minimum Investment $50,000
The property will be jointly managed by Equity One Group, and Greenbrier Management until stabilization. Equity One Group will provide turnaround strategy, technology, and financial supervision while Greenbrier Management will provide onsite management & implementation on daily basis.
Equity One Grouphas experience turning around depressed multifamily properties with full occupancy in short period of time by implementing proprietary property management & cost control system. The partners of the EOG has closed over $4 billion value of projects since 1997.
Greenbrier Management is a full-service property management company that was established in 1984. The principals of Greenbrier have been directly responsible for managing over 30,000 apartment units. Greenbrier’s recent portfolio consists of over 30 multifamily properties with a value in excess of $250MM.
In this transaction, EOG investors are to invest in EOG 008, LLC (“The Company”), which is to subsequently invest in Safeguard Townhomes LLC (“The Target”), a limited liability company that will directly or indirectly own interest in the Property. EOG (the “Real Estate Company”) is under contract to purchase the Property for $3.25 million ($41,666 per unit) and the total project cost is expected to be $$3.88 million ($49,801 per unit).
The Real Estate Company plans to implement a value-add strategy, in which it will capitalize $0.56 million ($7,179 per unit) to renovate the Property. $245,000 ($3,141 per unit) has been budgeted for interior unit upgrades which include new fixtures, blinds, black appliances, flooring, two-tone paint, six-panel doors, cabinet improvements, and countertop resurfacing. $156,000 has been budgeted to install submeters and split the water bills. Additionally, $63,550 has been budgeted for exterior improvements including exterior paint, roof improvements, carpentry, wrought iron, parking lot repairs, gutter repairs, pool renovation, leasing office renovation, and signage. The total CapEx budget also includes a $70,000 contingency (~7% of renovation costs) and a 5% construction management fee to be paid to the Real Estate Company ($20,413). Upon stabilization, the Real Estate Company expects to achieve gross rents of $720,588 per year (based on 10% vacancy projection). This represents a 55% increase to the current annual effective rent. The business plan calls for a four-year hold, at which point the Property will be sold at a 7%-7.5% cap rate.
Below is a summary of the capital improvements budget:
|Mechanical and Electrical Systems||$19,850|
|Asphalt seal coat & striping||$7,200|
|Exterior cleaning, painting, masonry, pointing, sealing||$12,000|
|Moving out renovation||$105,000|
|Empty Units Renovation||$140,000|
|Construction Management Fee||$30,000|
Built in 1966, Safeguard Townhome is a Class C apartment community comprised of 8 one-bedroom units, 62 two-bedroom units, and 8 three-bedroom units. Amenities include onsite laundry facility and playground. Unit interiors include laminate and carpet floors and walk-in closets. Within one to three miles of the Property is a Supermarket, Credit Union, Pharmacy, and an array of dining options. Although the Property has been well maintained, it has not undergone any major improvements recently (per Real Estate Company).
Source of Funds and Use of Funds
|Source of Fund||Use of Fund|
The expected terms of the debt financing are as follows:
- Lender: MF1 Bank
- Estimated Proceeds: $1,942,275
- Estimated Rate (Floating): One Month Libor plus 2.05%
- Amortization: 20 years
- Term: 3 years
- Interest Only: 5 years
- Exit Fee: 0.5% of loan proceeds
- Extension Options: Two (2) one-year extension options (no fee for the first, 0.25% for the second)
There can be no assurance that a lender will provide debt on the rates and terms noted above, or at all. All rates and terms of the debt financing are subject to lender approval, including but not limited to possible increases in capital reserve requirements for funds to be held in a lender controlled capital reserve account.
The Target intends to make distributions to investors (the Company and Real Estate Company, collectively, the “Members”) as follows:
- To the Members, pari passu, all excess operating cash flows to a 10.0% IRR to the Members;
- 50.0% / 50.0% (50.0% to Members / 50.0% to manager) of excess cash flow and appreciation thereafter;
Note that these distributions will occur after the payment of the Company’s liabilities (loan payments, operating expenses and other fees as set forth in the LLC agreement, in addition to any member loans or returns due on member loans).
The manager of The Company may receive a portion of the distribution. Distributions are expected to start in March 2020 and are projected to continue on a quarterly basis thereafter. These distributions are at the discretion of the Real Estate Company, who may decide to delay distributions for any reason, including maintenance or capital reserves.
The financials above assume that The Company invests $ 1,942,275 into Safeguard Townhomes LLC (“The Target”), a limited liability company that will directly or indirectly own interest in the Property. An additional $26,000 is intended to be raised to compensate The Company and/or RM Manager for legal, accounting, formation, diligence, related securities filings, travel and other fees. The Company may reduce the amount of such compensation if the amount raised is substantially less than expected, but in no event will the amount be less than $10,000.
Investors should not rely on any forward-looking statements made regarding this opportunity, because such statements are inherently uncertain and involve risks. We use words such as “anticipated”, “projected”, “forecasted”, “estimated”, “prospective”, “believes”, “expects”, “plans”, “future”, “intends”, “should”, “can”, “could”, “might”, “potential”, “continue”, “may”, “will” and similar expressions to identify these forward-looking statements.
Non-Transferability of Securities
The transferability of membership interests in The Company are restricted both by the operating agreement for that entity and by U.S. federal and state securities laws. In general, investors will not be able to sell or transfer their interests. There is also no public market for the investment interests and none is expected to be available in the future. Moreover, the estimated investment holding period described herein is only a projection, and there can be no assurance when or if an investment may be liquidated. Persons should not invest if they require any of their investment to be liquid. This is particularly important for persons of retirement age, who should plan carefully to assure that their assets last throughout retirement.
Capital Call Risk
The amount of capital that may be required by the Target from the Company is unknown, and although the Target does not require that the Company and its members contribute additional capital to it, it may from time to time request additional funds in the form of loans or sell additional equity. The Company does not intend to participate in a capital call if one is requested by the Target, and in such event the manager of the Target may accept additional contributions from other members of Target or from new members. In the event that the manager of Target advances any capital on behalf of the Company, it will be deemed to be a manager loan at an interest rate that cannot be determined at this time. Amounts that are contributed by existing or new members will be deemed to be additional capital contributions, in which case the Company’s interest in Target will potentially suffer a proportionate amount of dilution.
All funds from investors will be held in a non-interest-bearing escrow account with Attorny in Charge as escrow agent for the benefit of the investors in accordance with Rule 15c2-4 under the Exchange Act. All investor funds will be transmitted directly by wire or electronic funds transfer via ACH to the escrow account maintained by the escrow agent per the instructions in the Subscription Agreement. Upon certification by Third Party and acceptance by the Company that all contingencies have been met, the investor’s funds will be promptly transmitted to the Company. If the contingencies fail to be satisfied during the offering period, we will instruct the Escrow Attorney to return all funds to the investors without interest, deduction, or setoff, and all of the obligations of the investor hereunder shall terminate.
Floating Interest Rate
The loan being used to acquire the Property is expected to have a floating rate based on the London Interbank Offered Rate (“LIBOR”). If LIBOR increases the interest payments due on the loan are expected to increase as well. This could adversely affect the Property’s financial results or business operations and thus the value of the Company’s investment.
Apartment Complex – Competition
Competition in the Property’s local market area is significant and may affect the Property’s occupancy levels, rental rates and operating expenses. The Property will compete with other residential alternatives to attract tenants, including but not limited to other apartment units that are currently available for rent, new apartments that are built and condominiums/houses that are for rent or sale. If development of apartment complexes by other operators were to increase, due to increases in availability of funds for investment or other reasons, then competition with the Property could intensify. If the Property is not able to successfully compete with the competitive residential alternatives in the local or regional area this could adversely affect the ability of Target Entity to sell the Property, rent its units as necessary to maintain occupancy, and/or to increase or maintain unit rental rates.
The Property was 70% occupied as of April 2019, and the Target intends to implement a capital improvement plan involving the interior and exterior renovation of the Property, and a leasing program in its effort to add value to the Property. The Target intends to renovate all or some of the units within the Property and increase the current rental rates of such renovated units. There can be no assurance that, (i) the renovations will be consummated on a timely basis, (ii) the renovations will be completed satisfactorily, (iii) such work will not materially adversely affect other aspects of the operation of the Property, and (iv) the planned rental rate increase will have favorable results to meet the goals the Target projected. Any delays or negative results of the renovation work or rental increase efforts could adversely affect the Property’s financial results or occupancy levels, including its business operations and thus the value of the Company’s investment.
Virginia Hurricane Risk
Virginia is subject to frequent and sometimes debilitating natural disasters including but not limited to coastal hurricanes. There can be no assurance that hurricanes and flooding within the state, or any other environmental factor, will not cause significant difficulties and disruptions in the daily operation of the Property, or that Real Estate Company and the Target are properly insured for any such damage caused to the Property or its business operations. As a result, the business and financial condition of the Target, and thus the Company and its investors, may be materially adversely affected.
Interest-Only Loan Period
The loan being used to acquire the Property is expected to have an interest-only period during the first 5 years of the loan term, which means that there will be no reduction in the principal balance during that interest-only period.
The above is not intended to be a full discussion of all the risks of this investment. Please see the Risk Factors in the Issuer Document Package for a discussion of additional risks. The above presentation is based upon information supplied by the Real Estate Company and others. EOG, EOG-Manager, LLC, and The Company, along with their respective affiliates, officers, directors or representatives (the “RM Parties”) hereby advise you that none of them has independently confirmed or verified any of the information contained herein. The RM Parties further make no representations as to the accuracy or completeness of any such information and undertake no obligation now or in the future to update or correct this presentation or any information contained herein.
How are equity investments structured?
Investors are typically purchasing shares in a EOG-008 (“LLC”) that in turn invests into an LLC or Limited Partnership (“LP”) that holds title to the real property.
Why do investors invest into a EOG LLC instead of directly into the LLC that holds title to the real property?
By investing into a EOG-008, it minimizes overhead for the real estate companies who work with EOG and allows us to access more investment opportunities for investors. It also allows for streamlined reporting, distributions, and tax documentation through the EOG platform.
Who makes decisions in the EOG LLC that investors contribute to?
EOG Manager, LLC, a wholly owned subsidiary of EOG, is typically the Managing Member of EOG LLCs. RM Manager does not own a piece of the EOG LLCs, but is responsible for certain limited decision making. However, you will need to review the specific offering materials for each investment to fully understand the structure and the duties of all entities involved.
What are the tax implications of investing in Equity opportunities with EOG?
One of the benefits of investing in real estate equity through limited liability companies (LLCs) is that LLCs can be treated as partnerships for tax purposes. Partnerships generally are not taxed at the entity level (other than annual franchise taxes and filing fees) and can “pass through” applicable items of income, loss and depreciation to their members.
Non-cash depreciation deductions can shelter or eliminate the amount taxable income that may be otherwise passed through to an investor from a real estate equity investment, particularly in the early stages of the investment. As a result, cash distributions received by an investor, in a year when there is no corresponding pass-through of taxable income (again, due to depreciation deductions), may result in lower or deferred taxes.
The special purpose entity (an EOG LLC) you own when you invest in an equity transaction reports your annual share of income and loss and distributions on federal and state K-1s that you can then use to prepare your tax return. While the special purpose entities (the EOG LLCs) that are formed for each equity transaction typically are Delaware entities, there may be filing requirements and tax liabilities in other states depending on the details of a particular transaction, your state of residence, and the location of the investment property.
EOG and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. See offering documents for additional details, disclosures, and disclaimers.
What is Debt Service Coverage Ratio (DSCR)?
- The Debt Service Coverage Ratio is a measure of the cash flow available to pay current debt obligations. The ratio states net operating income as a multiple of debt obligations due within one year, including but not limited to interest, principal, and lease payments.
- It is generally calculated as Net Operating Income/Total Debt Service.
- A DSCR greater than 1 means the entity has sufficient income to pay its current debt obligations. A DSCR less than 1 means it does not.