The Ridgeview Report
Property Spotlight - The Pineview Townhomes
The Pineview Townhomes, situated in the southwestern suburbs of the Twin Cities in Jordan, MN, is a collection of 28 townhomes. The townhome complex is comprised of 14 two-bedroom and 14 three-bedroom units, of which each is two stories with an average size of 1,240 sq ft. The units offer ample space and are an ideal option for young families or professionals who desire extra living area.
Built in 2019, Pineview boasts modern amenities such as an in-unit washer and dryer, a single-car garage, and private patios at the rear of each unit. The interiors are immaculately clean with open floor plans, knock-down textured ceilings, and LED lighting. Each unit is equipped with centrally controlled heat, air-conditioning, and air exchangers for optimal comfort. The two-bedroom units feature an oversized walk-in closet in the master bedroom. Additionally, residents can enjoy the nearby playground and basketball court, enhancing their living experience at Pineview Townhomes.
How I Found the Pineview Townhomes
In 2020 I was a multifamily broker with 8 years of experience. After hours of scanning county records, skip-tracing LLCs, and cold-calling property owners, I landed a listing in thriving Jordan, MN. The owner and I collaborated and agreed on a listing price of $5.28 million. Despite my efforts, two issues impeded my success in closing the deal and earning a commission. First, due to mismanagement during the lease-up phase, the property was only 60% occupied. Second, we were five months into the COVID-19 pandemic, and many investors were “pencils-down”. I tried my best to get it sold, explaining to buyers that the low occupancy rate was a result of poor management. I even created a Loopnet listing for the property (Proof that good deals DO show up on Loopnet), but no luck.
I advised the sellers to switch to a new management company and focus on improving the property's occupancy rate. Six months later, the sellers informed me that they had engaged new management and the property had reached full occupancy. They were now ready to sell the property.
This time around I shoot my shot, I presented the opportunity to a high-net-worth individual from my network, proposing we purchase the building together. We spent a long time reviewing the underwriting and we both agreed, it’s a solid deal. Without any delay, we made an offer to the seller. We offered slightly less than the sellers asking price, but I waived my commission allowing the seller to net their full ask price. They accepted our offer and we proceeded to draft a purchase agreement. The due diligence process went smoothly and we closed on the property in July of 2021.
Our Business Plan
The Pineview Townhomes were targeted for an operational value-add strategy as they had negligible deferred maintenance and rental rates that were 20% lower than the prevailing market rate. The plan involved reviewing the leases, removing troublesome tenants, and increasing the rent to match the market rate. The only physical improvements required were discovered during the property inspection and involved the addition of water softeners to prevent scale build-up in the water heaters as well as the addition of landscaping to prevent erosion during heavy rainfall. We also added a subway tile backsplash to enhance the appearance of the kitchens. Beyond rectifying these builder oversights, the primary focus was to maximize property management and increase rent premiums to realize the property's full potential.
Why We Like It
The strategic location of the Pineview Townhomes is one of its major benefits. Situated in Jordan, MN, just off MN Hwy. 169, the property is only a 15-minute drive from Shakopee and 35 minutes from downtown Minneapolis. This makes it an ideal location for those who want to be close to the city but still enjoy the peace and tranquility of suburban living. The Minneapolis-St. Paul MSA is a hub for some of the biggest companies in the world, including United Health, Target, Best Buy, 3M, and US Bank. Jordan is a thriving community with a median income of $89,000 and a median home value of $450K. While there has been a surge in single-family home development in the area, the construction of multifamily properties has been minimal, with the Pineview Townhomes being the first development in over five years. The residents of Pineview have access to vast open spaces and hiking trails along the nearby MN Valley State Trail. The City of Jordan also boasts a vibrant city center, complete with restaurants, bars, shopping, and parks, offering residents a well-rounded living experience.
Through a Tax Increment Financing (TIF) arrangement, the property possesses a distinctive advantage that generates an additional income of $280,000, payable over a span of 6 years. To maintain eligibility for this incentive, it is required that 6 out of the total 28 units are rented to tenants whose income falls below 60% of the Area's Median Income. Previously, these 6 units were rented out at an affordable rate of $1,175 to cater to tenants within this income bracket. However, we have now shifted our approach and started renting these units to tenants holding Section 8 vouchers. By doing so, we have been able to increase the rent to $1,525. The tenants are only obligated to contribute a reasonable portion based on their individual circumstances, while the Housing Authority covers the remaining cost. This rent increase of $350 per unit per month has added a value of $420,000 to the property, considering a 6% capitalization rate.
How It's Going Today
Over the past 18 months, our Gross Income has increased by 11% with room for further rent growth. The average rent at purchase was $1,422 at acquisition, but we now rent out units for an average of $1,700. Currently, the property has an occupancy rate of 95% and we continue to experience steady leasing activity. We decided to retain the existing property manager at the time of sale, as they have shown their competence during the turnaround period and have been a pleasure to work with during the due diligence phase. Our experience with them has been very positive and we remain satisfied with their services.
The Capital Stack
We acquired the Pineview Townhomes for a total of $5,095,000, out of which $280,000 was allocated towards the TIF note and the remaining $4,815,000 for purchasing the complex. To finance the purchase, we secured a non-recourse Freddie Mac SBL loan of $3.71 million at an interest rate of 3.51% for 10 years, with a loan-to-value ratio of 72%. In addition, we allotted a budget of $50,000 for water softeners and landscaping renovations. We assigned $300,000 to cover the closing costs and working capital. The capital stack was completed with an equity investment of $1,735,000.
Market News
New York Flat Iron Building
According to a recent post on @TheRealDeal's Instagram account, the historic Flat Iron building in New York is once again up for auction. In the previous auction held in March, Jacob Garlick, an outsider to the industry, outbid a group led by the building's longtime owner, Jeffrey Gural. However, Garlick was unable to come up with the required $19 million deposit, leading Gural's group to decline an option to acquire the building at their last bid of $189.5 million. As a result, the fate of the building remains uncertain, and it is set to be auctioned off once again on May 23rd (TheRealDeal, "Flatiron Building").
(@TheRealDeal)."Flatiron Building", Instagram, 20 April 2023, https://www.instagram.com/p/CrRQ5etM7Pf/)
Tips and Tricks
Terms:
Operational value Add- Operational value add refers to improvements made to a property that focus on enhancing its operational efficiency, resulting in increased net operating income (NOI) and ultimately, increased property value. Examples of operational value add strategies in multifamily real estate may include improving property management, reducing expenses, implementing new revenue streams, and improving tenant retention rates through better tenant communication and satisfaction. The goal is to increase cash flow by optimizing the property's operations, rather than making physical improvements to the building itself.
TIF Note- A TIF note, or Tax Increment Financing note, is a type of financing tool used in real estate development projects. It is a form of public financing that uses future gains in taxes to subsidize the development costs of a project.
In the context of multifamily real estate, a TIF note can be used to fund a variety of costs related to a property, including the purchase price, renovation expenses, and working capital. In exchange for receiving the TIF note, the property owner must agree to certain conditions, such as providing a percentage of affordable housing units, and/or paying a portion of the tax revenue generated by the property back to the government to repay the TIF note. TIF notes can provide significant financial benefits to multifamily property owners and developers, including tax savings and reduced financing costs.
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