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Deal Review
Would you invest in this?
Clay Stanley
June 16, 2025
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Deal Review:
One of the best ways to learn as a limited partner, new or experienced, is to continue to look at deals to see what’s available on the marketplace today. I chose this deal randomly from my inbox so we will be going through it together. Exact information is slightly adjusted to protect the sponsor.
Today we are considering a 200+ unit multifamily deal build in the mid 2010s. It’s a nice looking complex in a decent location.
Market Analysis
Positives:
Secondary Market Strength: This is a secondary market experiencing strong population growth, with around 200,000 residents.
Limited New Supply: A key advantage of secondary markets is the typically limited new multifamily supply, which means this market likely avoided the oversupply issues seen in many primary Sunbelt markets.
Economic Development: The area has recently seen high-profile economic developments, bringing new jobs to the region.
Risks:
Tenant Concentration: A significant risk is that roughly half of the jobs in this market come from a single employer. While this employer is unlikely to leave, there's always a degree of uncertainty. Although the area is diversifying with new jobs, the investment would be severely impacted if this main employer relocated.
Secondary Market Liquidity: As this isn't a major Tier I or II city, exit liquidity might be affected. This is an important consideration when evaluating the conservatism of exit assumptions.
Property & Deal-Specific Analysis
Deal Structure:
Purchase Price: The basis of the purchase price appears decent at a high level. While it's concerning that 12 out of 15 sale comps provided by the sponsor are from 2021/2022 (peak pricing), the three more recent comps offer a more realistic look. Two are practically new builds and traded significantly higher than the subject property's contract price, while one of the same age traded for less. Overall, it seems O.K after a quick check.
Cap Rate: From a cap rate perspective, the deal seems reasonable, appearing to be under contract in the high 5s.
In-Place Occupancy: The property has an in-place occupancy of over 90%. This is of course good but I would want to understand how long it’s been above that 90% threshold.
GP/LP Splits: The preferred return and splits seems reasonable. Depending on the share class it is a 8% pref and either a 70/30 or 80/20 split.
Risks:
Value-Add Execution: Over 160 units still require renovation, introducing both execution and absorption risk. There's a question of whether the projected rents will be achieved and if it will happen at or under budget.
Deferred Maintenance: The sponsor claims limited deferred maintenance, but amenities are now over 10+ years old, and roofs and HVAC systems could start aging significantly during the hold period.
RUBS Revenue Ramp-Up: The project's financials assume utility income from RUBS (Ratio Utility Billing System) will ramp up to over 80%. It's unclear why the seller isn't already doing this, as RUBS is a widely known practice. Seller hates money?
Sponsor Risk
Track Record Evaluation:
IRRs: The sponsor's historical IRRs are strong; however, many were from short 2.5-year "flips" during low-interest-rate cycles. This doesn't necessarily indicate poor operation, but further understanding of the current portfolio's performance would be beneficial.
Key Risk - No Local Experience: The sponsor has not shown any historical projects in this specific market or area.
Partnership Risk:
Complex Management Structure: The sponsor is partnering with another large operator, primarily experienced in Northeast markets, with less clear experience in the Southeast. Furthermore, these two sponsors are using a third-party property manager. This creates a complex asset/property management structure.
Undefined Roles: There's no clear definition of roles among the various parties involved, which is a concern.
Debt / Capital Stack Risk
Assumable Loan & Preferred Equity: The deal involves an assumable loan plus preferred equity, leading to what appears to be a modest Loan-to-Value (LTV). This is generally acceptable but does create more dynamics to consider within the capital stack. It is not clear whether the preferred equity tranche is referencing Class A (mentioned in the below bullet point), or a separate loan all together.
Multiple Equity Classes & Hidden Leverage: There are three equity classes (A, B, C). Classes B and C are clearly common equity with terms varying by investment amount, which is normal.
However, Class A is structured as another form of preferred equity with a straight interest payment and no upside, and it will be repaid before Classes B and C. It is not clear whether the sponsor is raising two tranches of preferred equity. If Class A "equity" is not being included in their LTV calculation, then the deal is more highly leveraged than represented, which is a significant problem.
Underwriting & Financials
Assumptions:
Rent Growth: The underwriting assumes 3% annual rent growth, which is reasonable for this market based on the last 20 years of average rent growth. This is always an assumption to pay close attention to.
Expense Growth: The underwriting projects 2% annual expense growth. It's generally a point of concern when sponsors assume higher organic rent growth than their expense growth, especially in this market.
Pro Forma Breakeven Occupancy: The pro forma breakeven occupancy is in the mid 70% range, which is a positive.
Sale Proceeds-Driven Returns: Over 75% of the projected returns are derived from the sale of the property rather than from cash flow generated during the holding period. While not uncommon, it's an important aspect to understand. As an investor, you’re hoping the market you sell into is solid enough to support your expected sale price.
Would you invest in this deal? Let me know by hitting the reply button.
PERSONAL DEAL REVIEW FROM CLAY ✍️
If you’re considering a private real estate investment and would like a free deal review, please email me your pitch deck and associated docs at [email protected]. My expertise lies in SFR, BTR, and Multifamily. This review will be high-level, and any personal feedback I provide should not be used as a determination in making investment decisions.
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