Nearly a year has passed since our last Menlo Gate deal. We have been monitoring the Bay Area real estate market closely. We have reviewed dozens of transactions over the last year and have been waiting for the right property to come along for the next Menlo Gate group. We are pleased to report that we have found our next property.
We have prepared and attached draft pro-forma financials for Menlo Gate’s next Offering
Group for a pride of ownership duplex located in Redwood City, CA. Make no mistake; this is a pride of ownership building. The building has been well maintained throughout its ownership. This building is located in the Friendly Acres Area of Redwood City, CA. This area is alongside the new Stanford University development slated for Redwood City, CA. Stanford has already acquired the old Excite@Home location on Broadway and is scheduled to break ground on a new location on the opposite side of their Broadway location next year. This will translate to an inevitable increase in rental demand and appreciation for this location. Further, this location is close to transportation and easy access to the local up and coming downtown of Redwood City.
This is an off-market transaction that we secured through our network. The seller is in contract to buy an upleg 1031 property in San Diego, CA and requires a quick close of escrow in order to facilitate the San Diego purchase. Accordingly, we were made an offer to purchase the building that we simply could not refuse. We are in contract to acquire this asset for $975,000. A review of local comparable listings and sales reveals that this Menlo Gate Offering Group provides for captured equity in the range of $175,000 to $225,000. Over the last six months, we have seen the Bay Area rental market escalate rapidly with very low levels of multi-family properties on the market. Accordingly, very few owners are bringing their assets to market since there is simply no incentive for owners to transact, as they have watched their rent rolls swell. Further, real estate analysts and prognosticators have estimated that vacancies will dip below 4% nationally this year. Vacancy levels are expected to be even tighter here in the Bay Area and especially on the mid-Peninsula. As vacancy rates decline, it is estimated that rents will climb as high as 10% year to year for the next three to five years. Therefore, we have seen a tightening of the multi-family market as owners take advantage of low-interest rates and position themselves for the long term hold. Simply put, multi-family apartment buildings are the darling of the real estate industry and prices are escalating rapidly.
Pro Forma Financials and Assumptions:
The attached pro forma financials necessarily incorporate certain assumptions that are typical in the context of forecasting valuations for real estate investments. These assumptions are overviewed below and should be kept in mind in the course of reviewing the attached pro forma financials.
The average market rent for a one-bedroom apartment in San Mateo County is $2,648 per month, according to new rental data released by the San Mateo County Department of Housing. This reflects an 8.2 percent increase from last year. Escalating rents have translated into rising per door prices for multi-family acquisitions as net operating incomes have risen due to higher rental values. The company believes that it has acquired the subject property significantly under market. This translates into captured equity for the investors. The company conservatively estimates a captured equity range of $175,000 to $225,000.
The property is a very well maintained and updated duplex. In late 2013, the seller spent over $120,000 in updates and repairs. These updates included, but were not limited to, updated kitchens and bathrooms, new flooring, new lighting and updated wiring, plumbing upgrades, a new roof, and new yard landscaping. In total, there are two, two bedroom/one bath units. All units are permitted as part of the original construction, there are no unwarranted units. Based on similarly situated buildings in this location, Menlo Gate estimates a fair market rental rate for this location of $2,800 each for the two bedroom units. These rents are estimated at present market. Based on the rental estimates above, we have run the attached pro forma financials at a combined annual rent of $67,200.00. Further, we have estimated a conservative annual rental increase of 5%. The financials also reflect an equivalent vacancy rate for a one bedroom unit going vacant for a turn over during the one month. For the record, we generally do not see units go vacant for more than a month, even in the worst of times. Moreover, the seller separated the water and electrical meters for the units in 2013 as part of the $120,000 upgrade. Thus, there are no utility expenses on this property. Accordingly, the building has a combined pro forma Gross Operating Income of $66,528.
There is no present rate lock on this property as the company presently awaits a Commitment Letter from one of its primary lenders. Notwithstanding the foregoing, we have had multiple conversations with our loan broker regarding this property. The proforma financials reflect present financing rates and terms.
Pursuant to our broker’s walk through inspection, the building appears to be in excellent condition. All units have been updated by the present owner. All units are standardized in their modernization. There is limited deferred maintenance and the property is very well kept. Any foreseen repairs would be to units during turnovers or at the discretion of the management to modernize the units. These repairs, however, will be paid for using either tenant deposit withholdings or the cash flow from the property that is discussed further below. The pro forma financials also incorporate an annual repair expenditure of $4,800 per year for maintenance of the property. Although we do not expect to require this amount in annual maintenance for the property, this amount is incorporated in order to insure that the pro forma financials reflect a conservative approach for the potential investor.
We have calculated the appreciation of the property at 5% over the next seven years. For those of us who follow the Bay Area market closely, this is a conservative number based upon the timing of the acquisition. The appreciation for the property over seven years may exceed or fall short of this number. The estimated appreciation rate, however, represents a realistic middle ground number for the appreciation of Bay Area real estate. The expected sales price based upon appreciation is also calculated using the proposed purchase price of $975,000 which we believe to be an “under market” value for the Property. The figures represented in the pro forma financials are dependent upon risk factors overviewed in the private placement memorandum that can be downloaded from the Menlo Gate’s website.
Based upon the pro forma financials, the property has an estimated cash flow of approximately $14,783.00 in Year One, escalating to $28,165.00 in Year 5 (see Cash Flow After Tax and Long Term Financial Forecast). Taking the conservative approach and multiplying the Year One cash flow by seven years, this property has a hold cash flow of $103,481.00 over the seven year holding period. This is due, in part, to the down payment of $475,000 for the property from the Menlo Gate Group Eight capital pool and the ability to capitalize on historically low financing for this transaction. Accordingly, it is conservatively anticipated that there will be distributions to the 7 investors over the period of ownership of approximately $14,783.00 per investor (this calculation includes the company’s carried interest distribution and property management fees). This provides the investor with an approximated 16.89 % Return on Investment over the holding period and a 3.11 % annualized Cash on Cash return on the investment. These figures do not account for asset appreciation attributable to the investment. Further, these figures do not incorporate rent escalation which would necessarily increase the Return on Investment and Cash on Cash returns per investor. These figures represent estimated returns based upon the pro forma financials in Year One and are dependent upon the risk factors overviewed in the private placement memorandum located at Menlo Gate’s website.
As always, we are here to help and are available to answer any questions you may have following your review of the attached pro forma financials. We also encourage all potential investors to seek the independent advice of their tax consultant, attorney, or accountant regarding this or any significant investment. It is our goal to provide each investor with conservative investment vehicle that takes advantage of the leveraged rates of return of real estate.
This offering is limited to six investors. Three investor shares have been pre-sold and there are three remaining. The offering amount per investor is $87,500 (half shares are also available at $43,750). Subsequent to Menlo Gate, LLC’s receipt of confirmation of interest from the remaining three investors, this group will be closed.
We look forward to hearing from you and thank you very much for your continued support of Menlo Gate, LLC.