We have been monitoring the Bay Area real estate market closely. We have reviewed dozens of transactions since the close of Menlo Gate Group Eight last year. We 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 six units located in Redwood City, CA. Make no mistake; this is a pride of ownership building. The building has been well maintained throughout its ownership. We especially like this building for its location; close to transportation 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 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 $2,500,000. This equates to an average door price of $416,000 per door.
A review of local comparable listings and sales reveals that this Menlo Gate Offering Group provides for captured equity in the range of $300,000 to $500,000. There are multiple closed transactions in Redwood City at or above $500 per door with far less desirable unit mixes. Accordingly, we conservatively estimated the value of this property, with this unit mix, at $475K – $500K per door.
Over the last year, we have seen the Bay Area rental market escalating rapidly with very low levels of multi-family properties on the market. 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 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 $2,572 per month, according to new rental data released by the San Mateo County Department of Housing. This reflects a 12.3 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. Accordingly, comparable sales to date for 2015 establish per door prices for multi-family acquisitions in the range of $475,00 to $505,000 per door. 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 $50,000 per door. This per door savings multiplied by 6 units equates to captured equity in the range of $300K for this transaction.
The property consists of two separate buildings: a duplex, and a four-plex. In total, there are four, two bedroom units, and two one 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 this location of $2,850 each for the two bedroom units, $2,200 for the one bedroom units, and $3,000 for each of the duplex 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 $186,000.00. 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 two months. 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 property. The laundry room has a pair of machines set at fair market rates for laundry. We have estimated an annual income of $2,700 from the coin-operated laundry. Moreover, we have added income lines 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. Accordingly, the building has a combined pro forma Gross Operating Income of $189,840.00.
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 pro forma financials reflect present financing rates and terms.
Pursuant to our walk through inspection, the building appears to be in above-average condition. All but one of the units has 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 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 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 $3,600 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 7% 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. Based on this calculation, the property has a resale value of $4,014,454 after seven years at 7% appreciation. 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 $2,500,000 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 located at Menlo Gate’s website.
Based upon the pro forma financials, the property has an estimated cash flow of approximately $51,734.00 per year (see Cash Flow After Tax), or $362,138 over the seven year holding period. This is due, in part, to the down payment of $1,000,000 for the property from the Menlo Gate Group Nine capital pool and the ability to capitalize on historically low financing for this transaction. Accordingly, it is anticipated that there will be distributions to the 7 investors over the period of ownership of approximately $45,267.25 per investor (this calculation includes the company’s carried interest distribution and property management fees). Further, this number does not incorporate rent escalation which would necessarily increase the projected distribution per investor. This provides the investor with an approximated 5.09 % cash on cash return on investment. These figures do not account for asset appreciation attributable to the investment. 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 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 a conservative investment vehicle that takes advantage of the leveraged rates of return of real estate.
This offering is limited to six investors. Three shares have been pre-sold and there are three remaining. The offering amounts for Menlo Gate Group Nine are as follows:
Full Share: $200,000
Half Share: $100,000
Quarter Share: $50,000
Eighth Share: $25,000
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!
Menlo Gate’s latest acquisition group closed on Thursday, April 7, 2016. This six unit building was an off-market transaction that we secured through our network. The seller was engaged in a trade up 1031 transaction and approached us for acquisition based upon our reputation for closing deals. We are especially grateful to our agents at Terrace Realty for facilitating this transaction.
At the close of negotiations, we were able to enter into contract with the seller for $2,500,000. This equates to an average door price of approximately $415K per door which is conservatively $50,000 below the current average per door price for comparable units in pride of ownership areas. Accordingly, the Company conservatively estimates captured equity for the participants of Menlo Gate Group Nine Holding, LLC in the range of $300K.
Based upon the pro forma financials, the property has an estimated cash flow of approximately $51,734.00 per year, or $362,138.00 over the seven year holding period. This is due, in part, to the ability to capitalize on historically low financing for this transaction and the acquisition price negotiated by the Company. This provides Menlo Gate Group Nine members with an approximated 25.86% Return on Investment over the holding period and an approximated 5.09% annualized Cash on Cash return on the placement. These figures do not account for asset appreciation attributable to placement. Further, these figures do not incorporate rental escalation which will necessarily increase the Return on Investment and Cash on Cash returns per investor. These figures represent estimated returns based upon the pro forma financials and are dependent upon the risk factors over-viewed in the private placement memorandum located at Menlo Gate’s website.
This Menlo Gate group provides a healthy annual positive cash flow for all participants in one of the best rental income markets in the country according to recent national rental market reports issued by Marcus & Millichap and Colliers Parish. You don’t have to be a real estate guru to see that this was a great deal!
If you missed out on this opportunity, don’t despair. Menlo Gate, LLC is on the lookout for its next venture. We are presently analyzing pro formas for several properties. If you have any questions regarding our next group, or Menlo Gate, LLC’s structured real estate groups in general, please don’t hesitate to contact us.
Pro forma financials for our next group are available upon request to qualified participants. Inquiries may be submitted at www.menlogate.com or directly via email to firstname.lastname@example.org. You can contact us at (650) 641-2226. We hope to hear from you soon!