Group Eleven

Menlo Gate Group Eleven

Offering Letter

We have been monitoring the Bay Area real estate market closely. Demand for Redwood City rental housing is higher than ever before.  At the same time, market inventory is historically low.  The majority of rental property transactions are conducted off-market.  Sellers are actively engaging in up leg IRC 1031 transactions and trading up their portfolios.  Sellers are picking their transaction partners very carefully and choosing to sell their properties through broker relationships as opposed to the MLS.  As a result, few properties, if any, are actually making it to market.  This, in turn, has been driving prices up.

Redwood City, as we have all seen, continues to undergo a complete metamorphosis.  The downtown area has completely changed its landscape and scheduled construction continues to impact all sectors of the Redwood City market including, but not limited to, residential, multi-family, retail, and office.  To sum it up, Redwood City has become the “Darling” of the Mid-Peninsula real estate market.

Add to this the addition of the new Stanford University Campus on Bay Street in Redwood City.  Initially, some 2,400 employees will work on the site of the former Mid-Point Technology Park off Highway 101, about 5 miles from the main campus.  The new campus will initially develop 21 of the 35 available acres.  It will feature modern offices, a fitness center and pool, a town square and a park, among other amenities.  Stanford has also agreed to pay for the installation of a new public transport trolley that will service the new campus, the Fair Oaks District, and Friendly Acres District.  The new trolley will allow easy access from these three areas to the vibrant Redwood City Downtown corridor.  Groundbreaking has commenced, pads have been poured, and construction is underway.    

A Unique Portfolio Acquisition Opportunity:

Subsequent to the announcement of the new Stanford Campus, Menlo Gate began its search for property acquisition close to the new development.  We reached out to our broker network and pursued all possible leads.  Many sellers were aware of the new development and asking prices included what we began to refer to as the “Stanford development premium.” 

After nearly a year of searching, however, Menlo Gate, LLC has locked down a fantastic opportunity for its participants, a portfolio acquisition of a duplex and fourplex in the Fair Oaks and Friendly Acres districts.  Based on the addition of the new Stanford Campus and implementation of the new trolley, we believe the Fair Oaks and Friendly Acres districts will be the highest appreciating districts in all of San Mateo County over the next 5 years


We have prepared and attached draft pro forma financials for Menlo Gate’s next Offering Group for a duplex and fourplex located in the Fair Oaks and Friendly Acres districts of Redwood City, CA.  Both properties have the best unit mix possible with the duplex consisting of a three bedroom/two bath and two bedroom/one bath and the fourplex having four two bedroom/one bath units (very unique due to cash flow implications).  Further, both properties are located within walking distance to Stanford’s new campus and easy access to the local up and coming downtown of Redwood City.

This is an off-market transaction that has come to us through our network.  The seller is engaged in a trade up IRC 1031 transaction and wants to ensure that the timeline is controlled.  Accordingly, the seller brought this offer to Menlo Gate at a very attractive sales price in order to ensure that the deal would go through without any issues.  At the close of negotiations, we were able to enter into contract with the seller for a contract price of $2,875,000 for both properties

  

A review of local comparable listings and sales reveals that this Menlo Gate Offering Group provides for captured equity in the range of $150,000 to $250,000.  There are multiple closed transactions in Redwood City above this price with far less desirable unit mixes.  These buildings have a very attractive unit mix consisting of both three bedroom/two bath units and two bedroom/1 bath units. We have attached the Zillow Report for the duplex located at 1036 Dodge Dr., Redwood City, CA.   The Zestimate for the duplex is $1,329,431.  This value leaves an allocation of $1,545,569 for the fourplex with a per door price of $386,392.25.  This is an under market price per door for all two bedroom units.

Over the last year, we have seen the Bay Area rental market escalate rapidly with very low levels of multi-family properties on the market.  Very few owners are bringing their assets to market. 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 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 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, Redwood City rental real estate continues to be the darling of the real estate industry and prices are escalating rapidly.

You can read more about the present state of the Bay Area/Mid-Peninsula rental market, historically low vacancy rates, and the present state of the escalating real estate market at http://www.facebook.com/menlogate or athttp://www.menlogate.com under the “News” and Articles” tabs.

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.

Comparable Sales and Captured Equity:

The average market rent for a one-bedroom apartment in San Mateo County is $2,959 per month, up from $2,572 in 2016, according to new rental data released by the San Mateo County Department of Housing see https://www.rentjungle.com/average-rent-in-san-mateo-rent-trends.  This reflects a 15 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 properties significantly under market due to seller’s 1031 transaction and desire to control his sale/replacement property transation.  This translates into captured equity for the investors.  The company conservatively estimates a captured equity range of $150,000 to $250,000.

Rental Value:

The properties consist of a duplex in the Friendly Acres district and a fourplex in the Fair Oaks district; both districts are in Redwood City, CA and located adjacent to the new Stanford campus.  In total, there is one, three bedroom unit, and five two bedroom 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 the Friendly Acres duplex of $3,500 for three bedroom unit, $3,000 for the two bedroom unit.  The Company estimates a rental value of $2,450 for each of the Fair Oaks fourplex two bedroom units.  These rents are estimated at present market. The Company owns and manages units in these areas and is currently receiving these rents. Based on the rental estimates above, we have run the attached pro forma financials at a combined annual rent of $199,800.  We conservatively estimate a conservative annual rental increase of 5%. The financials also reflect an equivalent vacancy rate for a one bedroom unit going vacant for two months (2.5% vacancy rate). For the record, we generally do not see units go vacant for more than a month, even in the worst of times.

Further, there is a coin-operated laundry facility in a separate laundry room at the Fair Oaks fourplex property.  The laundry room has a pair of machines set at fair market rates for laundry.  We have estimated a monthly income of $350 per month, or $4200annual, from the coin-operated laundry.  Moreover, we have added an income line of $50 per unit/per month for the fourplex for the recovery of utility costs from tenants through Ratio Utility Billing Systems (“RUBS”).  RUBS allows the company to recover pro-rated utility (i.e. water and sewer charges) from the tenants based upon occupancy and use.  The duplex tenants pay their own utilities.

Financing:

Both properties are being acquired subject to the existing loans on the properties in order to avoid financing costs. The pro forma financials reflect present financing rates and terms at or around 4.00% for the seven year hold term.

Repairs:

Pursuant to our walk through inspection, the buildings appear to be in average condition.  All units are standardized in their modernization.  There is limited deferred maintenance.  Any foreseen repairs would be to units during turnovers to modernize the units. These property improvements, however, will be paid for using either tenant deposit withholdings or the cash flow from the property that is discussed further below. The repairs will be performed during tenant turnovers or at the discretion of the management. The pro forma financials also incorporate an annual repair expenditure of $6,000 per year for maintenance of the properties.  Duplex maintenance is statistically lower than other multi-family types.  The referenced allocation is therefore primarily for the fourplex.  Although we do not expect to require this amount in annual maintenance for the properties, this amount is incorporated in order to insure that the pro forma financials reflect a conservative approach for the participant.

Expected Sales Price:

We have calculated the appreciation for the properties at 5% over the next seven years. For those of us that follow the Bay Area market closely, this is a conservative number based upon the timing of the acquisition and the development of the Stanford Campus.  Based on this calculation, the properties have a resale value of over $4,045,413.72 after seven years at 5% appreciation.  Accordingly, the estimated appreciation for these properties is estimated at $1,170,413.70.  The appreciation for the property over seven years may exceed or fall short of this number. The estimated appreciation rate, however, represents a conservative number for the appreciation of Bay Area real estate. The expected sales price based upon appreciation is also calculated using the contracted for purchase price of $2,875,000 which we believe to be an “under market” value for these properties. The figures represented in the pro forma financials are dependent upon risk factors overviewed in the private placement memorandum located at Menlo Gate’s website.

Cash Flow:

Based upon the pro forma financials, the property has an estimated cash flow of approximately $46,173.48 per year (see Cash Flow Before Tax), or $323,214.36 over the seven year holding period. This is due, in part, to the down payment of $1,500,000 for the property from the Menlo Gate Group Eleven capital pool and the ability to capitalize on the subject to financing for this transaction. Accordingly, it is anticipated that there will be distributions to the each member over the period of ownership of approximately $46,173.48 per member (this calculation includes the company’s carried interest distribution and property management fees).  This number does not incorporate rent escalation which would necessarily increase the projected distribution per investor. This provides the investor with an approximate 3.08 % cash on cash return on investment at a 4.35% capitalization rate.   These figures do not account for asset appreciation attributable to the investment.  The annual return on investment with appreciation with these assumptions is 13.96% per participant.  These figures represent estimated returns based upon the pro forma financials 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 members 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 a conservative investment vehicle that takes advantage of the leveraged rates of return of real estate.

This offering is limited to six members.  The offering amounts for Menlo Gate Group Eleven are as follows:

Full Share: $250,000

Half  Share: $125,000

Quarter Share: $62,500

Eighth Share: $31,250

Subsequent to Menlo Gate, LLC’s receipt of confirmation of full conscription, 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!

Closing Letter

Subsequent to the announcement of the new Stanford Campus, Menlo Gate began its search for property acquisition close to the new development. We reached out to our broker network and pursued all possible leads. Many sellers were aware of the new development and asking prices included what we began to refer to as the “Stanford development premium.”

After nearly a year of searching, Menlo Gate, LLC locked down a fantastic opportunity for its participants; a portfolio acquisition of a duplex and fourplex in the Fair Oaks and Friendly Acres districts. Based on the addition of the Stanford Campus and implementation of a new trolley system, we believe the Fair Oaks and Friendly Acres districts will be the highest appreciating districts in all of San Mateo County over the next 5 years. 

New Stanford Campus in Redwood City, CA
A review of local comparable listings and sales reveals that this Menlo Gate Offering Group provides for captured equity in the range of $150,000 to $250,000. There are multiple closed transactions in Redwood City above this price with far less desirable unit mixes. This provides our members with approximately a 3.08% cash on cash return at a 4.35% capitalization rate. These figures do not account for asset appreciation attributable to the investment. The annual return on investment with appreciation with these assumptions is 13.96% per participant. These figures represent estimated returns based upon the pro forma financials 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 answer any questions you may have regarding Menlo Gate, LLC and our syndication opportunities. It is our goal to provide our members with a conservative investment vehicle that takes advantage of the leveraged rates of return of real estate.

We look forward to hearing from you and thank you for your continued support of Menlo Gate.