Steve Prochnow - MSRE Blog: August 2012

J Garcia Realty, LLC

Building Acquisition

Final Investment Memo

Briarcliff Manor

425 N. Rosemount

Dallas, TX 75208

Briarcliff Manor Apartments

425 N. Rosemont, Dallas, TX 75208

PROPOSED TRANSACTION

Proposal is to acquire a 23-unit, 17,385 square foot multifamily property in Dallas, TX for a total acquisition cost of $750,000 requiring an initial investor contribution of $250,000. Investment analysis suggests Unleveraged Internal Rate of Return of 8.56% and Leveraged Internal Rate of Return of 15.23% over an assumed five year holding period.

EXECUTIVE SUMMARY

J Garcia Realty, LLC would like to purchase a 23-unit multifamily property in the North Oak Cliff neighborhood of Dallas, TX for a total asking price of $750,000. After acquisition costs and including $30,000 of necessary renovation capital, the total acquisition basis would be $795,000. At the $750,000 acquisition price, the entry cap rate would be 7.84% based upon the estimated Year 1 NOI. With successful implementation of the Business Plan, analysis suggests Unleveraged Internal Rate of Return of 8.56% and Leveraged Internal Rate of Return of 15.23% over an assumed five year holding period.

Built in early 1960’s in the revitalized North Oak Cliff neighborhood of Dallas, the property offers 17,385 of rentable square feet spread between five different one and two bedroom floorplans. The property currently offers large floorplans and rent rates that are at or below current market rates. With basic property improvements performed at acquisition and improved management processes, it is estimated that the property resident base and average rental rates would be improved over time. Additional improvement projects would be considered throughout the holding period if any adequate return on investment could be realized.

The property is located within North Oak Cliff and in close proximity to the Bishop Arts District and Winnetka Heights. The Bishop Arts area has recently revitalized with desirable high-density retail and entertainment being added to the area. As of now, an extensive market observation and a formal market survey indicates that there is a lack of desirable housing in the area so many of the visitors travel in from other areas. New residential developments are starting to spring up in the area, including a new 207-unit luxury community immediately adjacent to Briarcliff Manor. In order to continue to improve into a high-profile commercial center with a variety of shopping and dining options, more acceptable housing options will need to be added and Briarcliff Manor will be well-positioned to capture the influx of new residents.

KEY REASONS FOR INVESTMENT

- First-mover advantage into redeveloping market – Many new commercial projects have sprung up in the Bishop Arts District, but the area is noticeably lacking acceptable residential options. City of Dallas presentations show that development of North Oak Cliff is a key city imitative. New residential developments are in their early stages but will not be ready for new residents for 12 months or more.

- Rent growth potential with basic improvements – Analysis shows favorable returns are probable without significant rent growth, but market analysis shows a significant rent upside with basic improvements. Acquisition capital would be deployed to improve property signage, exterior appeal, and landscaping. Future improvements would be considered if they are able to reach a desired return on investment.

- Property Management improvement potential – The property is currently being managed by a resident. J Garcia Realty, LLC was founded by an experienced residential property management professional who could utilize his professional experience on this property.

- Desirable cap rate compared with other properties in today’s multifamily seller’s market – Smaller and older properties are not typically targeted by many institutional investors who are seeking a much higher return. Larger core multifamily properties are trading at sub-5% cap rates in today’s market while this property is being offered at a 7.84% cap. J Garcia Realty Investors LLC operates with a lower overhead and is able to invest in projects that other larger firms are unable to consider.

KEY ACQUISITION RISKS

- Property Condition and Maintenance – With the property being built in the early 1960’s, maintenance issues will need to be dealt with professionally and efficiently. In order to predict upcoming potential maintenance issues, a full property inspection with an industry expert will be conducted. The system operates with a 2 pipe chiller unit which is costly to replace.

- ‘All Bills Paid’ utility structure – The current utility payment structure puts the landlord at risk if utility prices increase dramatically. Investigation would be done to determine the process that would be required in order to change to a system where residents pay utilities directly.

MARKET OVERVIEW

The Dallas / Fort Worth area and the associated rental demand are expected to grow in population tremendously over the next 30 years. According to the Real Estate Center at Texas A&M University, the population of Dallas is forecast to increase by 38% between 2010 and 2030. The projected population in 2040 is 10.1 million people, compared with a current population of around 6.3 million people. Much of the growth in the area has occurred in suburbs to the north of Dallas, but new focus has turned from residents and City Hall to promote growth in urban in-fill locations that have previously fallen on hard times. North Oak Cliff and the Bishop Arts area are well-positioned to benefit from the urban redevelopment trend.

North Oak Cliff Area

**Courtesy of Offering Memo

Many Dallas area residents are beginning to appreciate the commercial benefits of North Oak Cliff and the Bishop Arts, but there is a noticeable lack of acceptable residential choices for potential renters in the area. Many of the local competitors accept Section 8 vouchers, which can deter non-assisted housing residents. Other competitors lack present-day standards for an apartment community like desirable curb appeal or a basic website and online marketing presence. Still other competitors are tightly bunched in areas west and northwest of Briarcliff Manor and have no chance to capitalize on the improvements in the Bishop Arts area. In general, for a variety of reasons there aren’t a significant amount of current competitors that would restrict the growth and improvement of Briarcliff Manor

Area Map

A basic market survey shows immediate rent growth potential. Briarcliff Manor is currently offering an ‘All Utilities Paid’ structure for similar rents to competing properties. If reasonably possible, management would plan to transition away from the ‘All Utilities Paid’ structure without sacrificing rent. Although some residents may depart, many will shop around to find that there is a lack of acceptable rental options in Briarcliff Manor’s general price range. New developments are planned in the area including Wood Partners’ new 207-unit luxury community immediately adjacent to Briarcliff Manor, although that development should not be considered a threat because the anticipated rents will be beyond what our current resident base would be willing to pay. Instead, we expect to gain residents once the new development is completed as more residents are attracted to the area but don’t want to pay luxury community rents.

1 Bedroom Basic Market Survey

Property	SF	Rent	Rent / SF	Utilities
Briarcliff Manor	615	$625	1.02	included
Country Greens	650	$705	1.08	not included
Casa Trevino	650	$600	0.92	not included
Oakwood	640	$725	1.13	not included
Oakwood	730	$725	0.99	not included
Cantera Crossing	615	$535	0.87	not included
Cantera Crossing	705	$559	0.79	not included
	657.86	$639	0.97

2 Bedroom Basic Market Survey

Property	SF	Rent	Rent / SF	Utilities
Briarcliff Manor	780	$725	0.93	included
Briarcliff Manor	840	$725	0.86	included
Briarcliff Manor	945	$725	0.77	included
Country Greens	725	$725	1.00	not included
Oakwood	890	$848	0.95	not included
Oakwood	955	$848	0.89	not included
Cantera Crossing	850	$699	0.82	not included
Cantera Crossing	1035	$699	0.68	not included
	877.5	$749	0.86

Competitor Map

FINANCIAL ANALYSIS

According to underwriting, unleveraged returns of 8.56% and leveraged returns of 15.23% are possible over an assumed five year holding period.

U-IRR: 8.56%

L-IRR: 15.23%

NOI - Year 1: $58,303 or $2557 per unit

Annual Debt Service – Year 1: $35,108 or $1526 per unit

Cash Flow - Year 1: $18,895 or $822 per unit

Net Rental Yield – Year 1: 7.84%

Cash on Cash Rental Yield – Year 1: 7.558%

Key underwriting assumptions are as follows:

Acquisition Price: $750,000

Renovation Expense: $30,000

Entry Cap Rate: 7.84% - based upon estimated year 1 NOI

Exit Cap Rate: 7.84% - kept constant in underwriting to be conservative

LTV: 72.67%

Amortization Period: 30 years

Interest Rate: 5% - based upon market interest rate research.

Assumed Vacancy: 5% - based upon market research for Dallas area

Rent Growth Rate: 3% - industry standard growth assumption

Expense Growth Rate: 2% - industry standard growth assumption

Closing Costs: 2.5%

Asset Underwriting

EXIT STRATEGY

Financial underwriting was completed with an assumed five year holding period however the actual hold time could vary based upon market conditions and investor needs. Exit cap rate was assumed to be the same as the initial cap rate for comparison purposes, although some cap rate change would be expected throughout the holding period. Instead of relying solely on cap rate improvement in order to make this investment successful, the focus during the holding period would be to improve NOI by upgrading the property, increasing rents as the area improves, and improving management efficiencies. Focusing on NOI improvement will be the key to maximizing sale value at the appropriate time.

EXHIBITS

Property Pictures

Market Survey

Works Cited

Full Underwriting – separate attachment