In an insightful conversation with Jorge Abreu and Brian Wagers from Elevate Commercial Investment Group, Sam Newell from MFI Club and Ameet Mehta from SponsorCloud sit down to analyze a value add deal breakdown.

Understanding the Deal

Jorge and Brian orchestrated a remarkable value-add deal in Augusta, Georgia, that yielded their investors an incredible 110% Annual Average Return (AAR). They leveraged their expertise with a portfolio of 6,000 doors to make it a success.

This deal is a testament to their ability to identify overlooked opportunities in the real estate market. Their strategic planning and execution created an investment opportunity that delivered exceptional returns to their investors.

The Deal Breakdown

The workforce housing property was owned by an investor for over 10 years but the investor had failed to maintain the property or make needed improvements. Jorge and Brian saw this as an opportunity. They recognized the potential to reposition the property through strategic renovations and upgrades, thereby significantly increasing its value.

What Almost Went Wrong on This Deal

Timing the market was pivotal in transforming this into a tremendous success for Elevate and its investor group. By selling the property just before interest rates surged, they secured a favorable outcome that would have been significantly less advantageous had they held onto the asset for even a few more months. 

Ineffective management of the property manager could have severely delayed the business plan, potentially turning it into a “recipe for disaster.” Proper oversight was crucial to keeping the project on track and ensuring its success.

Sourcing the Deal

The opportunity to secure a value add deal in Augusta, Georgia, came through a local sponsor and a trusted broker, Capstone. 

At the time, most investors were laser-focused on Atlanta, where the market was saturated. The prices per door had escalated beyond what Jorge and Brian considered optimal for strong returns.

Recognizing the potential in overlooked markets, they turned their attention to Augusta. The deal was brought to their attention by a local sponsor with deep local knowledge and connections in Augusta, GA. This collaboration was key to identifying an undervalued property that had significant upside potential.

By looking beyond the crowded Atlanta market, they were able to capitalize on Augusta’s emerging growth and favorable price point. Their foresight allowed them to secure a deal that many other investors had missed.

Property Tour & Identifying Areas for Improvement

When Jorge and Brian conducted a property tour, they identified that the property needed quite a bit of renovations and value-add features. Their revitalization plan included:

➡️ Repairing sewer issues

➡️ Replacing HVAC Systems

➡️ Repairing roofs

➡️ Painting bricks and every wall

➡️ Redoing the landscape

➡️ Redoing the pool

➡️ Repairing the parking lot

➡️ Reorganizing the leasing office

Additionally, Jorge stated that their very first strategy was to enhance the security of the premises and make the tenants feel safe. This included ensuring the gates were secured and adding cameras. Then, they started rehabbing the vacant units. 

On this specific deal, they redid 25% of the interior units.

Underwriting & Top Due Diligence Metrics

Jorge and Brian saw the potential in Augusta by analyzing key metrics such as:

• Historical Market Trend (5-10 years) - Positive
• Job Growth Trend (5 years) - Positive
• Population Growth Trend (5 years) - Positive
• Market Performance During the Last Recession
• Affordability for Setting Rent Price 
• Crime Rate Analysis 
• Type of Tenants to be Expected

They observed positive trends in these areas, indicating a market that could support their value-add strategy. Additionally, they found that the asset was priced at $55,000 per door, making it an attractive investment opportunity.

The deal was underwritten with the goal of conservatively achieving an 18% to 20% Internal Rate of Return (IRR).

This conservative approach was designed to protect the downside while allowing for meaningful upside potential.

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Protecting Downside

For this deal in Augusta, Jorge and Brian implemented several strategies to safeguard the investment against potential risks, especially in a fluctuating economic environment.

• Structured Debt: They secured good debt with favorable terms. They focused on structuring the debt with fixed rates, avoiding the volatility of variable rates that could inflate costs unexpectedly. This approach provided a stable foundation, even if interest rates increased over time.

• Conservative Leverage: In the current market, where inflation and credit card debt are squeezing B and C-class properties, Jorge and Brian adjusted their leverage strategy. They adopted the philosophy that "70% is the new 80%," opting for lower leverage to reduce financial risk. 

• Breakeven Occupancy Rates: Another critical factor in downside protection was analyzing the breakeven occupancy rates. By understanding the minimum occupancy needed to cover all expenses, they could assess the risk more accurately and prepare for potential vacancies.

• Strong Partnerships: Having strong, experienced partners was key to mitigating risk. Working with partners who had deep knowledge of the Augusta market and having boots on the ground provided a significant advantage. These partnerships ensured that the team could navigate local challenges effectively.
  

Firming Up the Rehab & Reserves Budget

Jorge and Brian are also owners of a construction company, which gave them an edge in accurately estimating the rehab budget. After conducting the property tour and identifying areas that needed repair, they had come up with a budget that worked well for them. 

They have also adapted their business planning to account for the unexpected, ensuring that every aspect of the deal is fortified against potential risks. This includes:

• ROI-Focused Upgrades: Their focus was on renovations that would directly increase rental income or property value, avoiding unnecessary expenses that might not yield a substantial return on investment.
  
• Operational Reserves: By allocating more funds to operational reserves, they ensure that the property can withstand unexpected expenses, such as emergency repairs or temporary dips in occupancy.
  
• Interest Reserves: Jorge and Brian have incorporated larger interest reserves into their planning, which allowed them to cover any increases in interest payments without straining the cash flow. This is an important strategy as interest rates are subject to frequent fluctuations.
  
• Reserve for Preferred Equity Payments: Setting aside funds specifically for preferred equity payments. Ensuring that these obligations are met, regardless of market conditions, is vital for maintaining investor confidence and keeping the project on solid ground. This reserve acts as a safeguard, ensuring that all financial commitments are honored.

Let's get the lowdown from the experts:

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How the Deal Looked

➡️ Per door price: $55,000

➡️ Number of units: 104

➡️ Purchase price: $5.7 million

➡️ CapEx: Under $1 million

Closing the Loan

They opted for a bridge loan. They secured a two-year loan with one optional extension year at a floating rate of 4.25% and LTC was approximately 80%.

Deal Structure

For this particular project, they did a 70-30 straight split where 70% of cash flow went to the investors (Limited Partners) and 30% went to the General Partners (GP). 

That said, Jorge and Brian now incorporate a waterfall structure in their returns distribution strategy. They typically have an option of 6-8% preferred return in place. After that, they prefer to go with either a 70-30 or a 60-40 split. 

Executing the Business Plan

With a strong team in place, Jorge and Brian explained how they executed their business plan. This involved ensuring that they were able to realize their estimated numbers. This meant a lot of unannounced visits and calling in monthly meetings to see if they were hitting the right numbers. 

They also ensured that everything is filled out online by the property manager and that he is hitting the marketing goals. 

Successful execution of the business plan was critical to achieving the remarkable 110% AAR. Their meticulous approach, combined with strong on-the-ground support, ensured that every aspect of the plan was implemented effectively and efficiently. This involved:

➡️ Constant On-Site Presence and Frequent Visits:

Having a reliable partner on the ground was essential. This partner was consistently on-site, overseeing daily operations and ensuring that everything stayed on track. Additionally, Jorge made multiple trips to Atlanta, closely monitoring the progress and making adjustments as needed. 

➡️ Proactive Occupancy Management:

Maintaining a high occupancy rate was a top priority. Jorge and Brian aimed to keep occupancy at 95% or higher. They didn't just look at overall occupancy rates but broke them down by specific units and unit types. This meant identifying any units that were lagging behind and taking targeted actions to improve the performance.

➡️ Rent Specials and Pricing Strategies:

To ensure steady demand and high occupancy, they implemented rent specials where necessary, attracting tenants to fill any vacancies quickly. However, rather than relying heavily on concessions, which they don’t favor, they opted for more frequent price adjustments. This strategy allowed them to stay competitive in the market while maximizing rental income without compromising too much on rental rates.

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Property Management (3rd Party Management or DIY?)

Property management can make or break a deal. Jorge and Brian knew that relying too heavily on a third-party property manager could lead to significant challenges. To avoid potential pitfalls, they adopted a hands-on approach, ensuring no detail was overlooked. They suggest:

• Micromanagement and Constant Monitoring: Jorge and Brian set up a system to track and analyze key metrics, constantly. They used it to monitor the property manager's progress as well. Weekly asset management calls were key to this approach. These calls let them stay on top of every aspect of the property's performance, from leasing to maintenance.

• Secret Shoppers and Unannounced Visits: Jorge and his team used the "secret shopping" strategy to manage their on-site property manager. To ensure the on-site team was performing as expected, they employed secret shoppers to act as potential residents. These shoppers would visit the property without notice. They would assess everything, from the cleanliness of the leasing office to the staff's attentiveness. This approach helped them find weaknesses in the management team. They took corrective actions before these could hurt the property's success.

Above all, the purpose of this strategy was to get an honest answer to the following questions:

➡️ What are potential residents seeing when they pull up to the property?

➡️ What is their path, the signage? Does it look attractive? 

➡️ What's the curb appeal?

• Focus on Leasing and Marketing:  Jorge and Brian pushed the needle on leasing by closely tracking traffic, analyzing what marketing strategies were bringing in the most leads, and ensuring that follow-ups were not missed. 

• Secret Shopping Competitors:  They also secret-shopped their competition to gauge where they stood in the market and identify any gaps in their own leasing efforts.

• Regular On-Site Inspections: Unannounced visits were another tool in their arsenal. By visiting the property without giving the management team a heads-up, they could see the property in its true state—whether the leasing office was open, if there was trash around the property, and how well-maintained the model unit was. 

• Leveraging Technology: They also used dashboards for property management. These dashboards provided real-time updates on key performance indicators. This technology allowed them to monitor the property’s status remotely. It ensured that even if they couldn’t be on-site, they were still in control of the situation.

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Investor Communication

Jorge and Brian stated the importance of having a software that streamlines the distributions and investor communication. This is where they utilized SponsorCloud’s SyndicationPro CRM Platform to keep track of their investors, ensure they received timely updates and provided a user-friendly interface to enhance the investor experience. 

Brian states, “Having a good software for anything makes your dollar per hour go up if you can get more done and make it a more investor-friendly experience. On the investor front, SyndicationPro has been definitely huge for our investors and for ourselves and for being able to partner with other investors”.

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Sending K-1s to the Investors

Jorge highlighted the importance of sending out tax documents to investors before the tax season hit so that all their investors had their tax documents to file on time. They utilized the “bulk upload” feature, which was a game-changer. 

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Distributions

A key aspect of any real estate investment is the timing and structure of distributions to investors. Jorge and Brian tailor their distribution strategy based on the deal structure they decide upon. There can be two types of distributions:

• Quarterly Distributions for Syndications: In syndication deals like this one, distributions are typically made on a quarterly basis. This approach matches the property's cash flow cycles. It allows time to collect rent, pay expenses, and then distribute profits to investors. Quarterly distributions offer a steady return. They balance the need for regular income with the realities of property management and cash flow.

• Monthly Distributions for Funds: When operating within a fund structure, distributions can be more frequent, often occurring on a monthly basis. This setup can be more attractive to investors seeking a steady income stream, as it provides more immediate access to returns. The monthly distribution model is best for funds with multiple assets. It works well where cash flow is more consistent and predictable across the portfolio.

When to Sell?

Having timed the market and the trend, Jorge and Brian realized that the deal had reached its highest potential in a little less than a year. They realized that the market was going to overturn in a few months time and, hence, they decided to exit the deal in just under one year.

They emphasized that it is crucial to time the market and stay ahead of upcoming trends. This way, fund managers and sponsors can get the right timeframe to get out with profits. 

Investor Returns

As was the highlight of this conversation, the investors received a marvelous return of 110% AAR. This positioned Jorger and his team as experts in real estate syndications. 

How Elevate Commercial Investment Group Leveraged SyndicationPro by SponsorCloud

Jorge and Brian talked a lot about how they utilized SyndicationPro in this deal. 

They had been using the platform for a couple of years now. For this deal, SyndicationPro helped them streamline their investor communication side and ensure K-1s were sent to each investor right on time. This led them to be very active on the tax end of things, both for investors and their companies. 

Brian also acknowledged that Ameet and his team were open to feedback. They worked on the feedback to include advanced features that would further streamline the entire process for the sponsors and co-sponsors. 

The Result

➡️ Projected AAR: 22% (already considered excellent)

➡️ Actual AAR: An astounding 110%

➡️ Exit Timeline: Precisely one year from acquisition

This rapid turnaround didn't just maximize returns; it shielded investors from the market volatility that was just around the corner. As Jorge poignantly notes, "If we would have taken any longer on any of it, whether the renovations or the evictions, investors may have only gotten like a 50% AAR."

A 50% AAR would still be celebrated by most. But the delta between 50% and 110% underscores the impact of their swift, hands-on approach. It's a testament to the power of not just identifying opportunities but executing them with precision and speed.

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Wrapping Up!

The Augusta deal, with its staggering 110% AAR, is more than a financial success story. It's a masterclass in seeing beyond conventional wisdom. It shows the power of hands-on management. It highlights the impact of swift, purposeful action driven by advanced software.

In today's uncertain climate, many deals are struggling and some investors are retreating. In contrast, Elevate Commercial Investment Group offers a different story. Their message isn't just about chasing high returns; it's about building resilience. It's about protecting the downside while you reach for the upside.

As our industry navigates choppy waters, the lessons from Augusta become even more pertinent. Look where others aren't looking. Know your numbers. Be present, be proactive and always, always adapt.

For those willing to learn, to work, and to see beyond the obvious, opportunities still abound. Even in unlikely places like Augusta, Georgia, there are gems waiting to be found. With expertise and determination, they can shine brighter than expected.