Equity Deals
Preferred Equity Overview
The commercial real estate landscape has fundamentally shifted in the past 18 months where we have exited the era of zero-interest rate policy driven by the Federal Reserve. This period resulted in historic (and arguably artificial) low interest rates and very liquid debt markets, which led to a decade of speculative development and asset appreciation.
New Construction
The life-cycle of a development deal typically begins 2-3 years before breaking ground on construction. Manydevelopers have already raised and deployed significant amounts of common equity prior to closing a loan. Higher cost of capital combined with lower leverage equates to increased equity needs.
Refinance
Many loans that were made between 2019-2021, when interest rates were at historic lows, are now coming due. In many cases, there is not enough income from properties to refinance current debt without bringing additional equity to the table.This situation is considered a “cash-in refinance,” which is a situation seldom seen in the past decade
Value-Add
Value-add opportunities present the ability to add significant asset value over a short period oftime, with much cheaper debt available upon completion. Once stabilized, this increased value provides the Sponsor the opportunity to replace our bridge investment and preserve the ability to control cashflow and value appreciation.
Preferred Equity Deals - Realized Returns
TRE Newton
Deal Highlights:
- Construction and lease-up of the 52-unit apartment project known as Newton Street Apartments located in the Sloan’s Lake neighborhood of Denver, CO.
- Jan 2021 - Oct 2022, $1.27MM total investment, 14.96% deal-level IRR. Twelve percent (12%) coupon for 24 months with 9% current pay and 1% origination fee paid by Sponsor.
- AVP’s investors received an 8% annual cash-on-cash return (paid monthly throughout the life of the hold period), a 12.25% net IRR, 14.96% deal-level IRR, and a total equity multiple of 1.26x over 22 months. The protected basis was only 68% of stabilized value providing significant downside risk.
AVP Orchard
Deal Highlights:
- Recapitalization of a 112-unit apartment complex, known as Orchard Park Apartments in Nashville, TN.
- May 2022 - March 2024, $2.8MM total investment, 13.37% deal-level IRR. Twelve percent (12%) coupon for 24 months with 8% current pay and 1.5% origination fee paid by Sponsor.
- AVP’s investors received an 8% annual cash-on-cash return (paid monthly throughout the hold period), a 12.22% net IRR, and a total equity multiple of 1.2x over 22 months.
AVP Mountainside
Deal Highlights:
- Recapitalization of a 196-unit apartment complex, known as Mountainside Apartments in Birmingham, AL.
- Oct 2022 - June 2024, $3.76MM total investment, 15.71% deal-level IRR. Fourteen percent (14%) coupon for 36 months with 9% current pay and 2% origination fee paid by Sponsor.
- AVP’s investors received an 8% annual cash-on-cash return (paid monthly throughout the life of the hold period), a 13.43% net IRR, and a total equity multiple of 1.21x over 20 months.
Current Equity Deals
AVP Dry Creek
A preferred equity investment in the construction and sale of the 11-acre, 9-pad flex/office/light manufacturing type project known as Dry Creek Business Parklocated in the Arista neighborhood of Broomfield CO (the “Property”). The Sponsoris a very well-known and experienced owner/developer. The Sponsor acquired the land and completed all preliminary entitlements and approvals required for the project prior to AVP’s investment.
Funded September 2021
$2,000,000
Deal Structure:
- $2MM total investment by AVP. Twelve percent (12%) coupon for 24 months with 8% current pay and 2% origination fee paid by Sponsor.
- AVP’s global investors are projected to receive an 8% annual cash-on-cash return (paid monthly throughout the life of the hold period), a 15.68% net IRR, and a total equity multiple of 1.34x over a projected 2-year hold period.
- Until closing of the construction loan, AVP’s preferred equity was the most senior investment in the land and improvements, with an as-is valuation of $7.5MM, putting AVP’s going-in basis at 26% LTV.
- The protected basis of preferred equity is projected to top out at 57% of stabilized value and, therefore, the proforma exit price would have to decrease by 43% to experience any risk to AVP’s investment. Alternatively, the exit cap rate would need to expand by over 450bps to 9.75% and/ or NOI would need to decrease by over 45% for the preferred equity investment to experience any exit risk.
- Sponsor has exercised its option to extend for 12 months.
AVP Royal Plaza
Preferred equity investment in the acquisition and renovation of a 100-unit apartment complex, known as Royal Plaza Apartments
(the “Property”). Property consists of 8 buildings and sits on 2.14 acres of land located 3 miles from downtown Pueblo. The Sponsor is an experienced multi-family owner/developer with extensive experience and presence in Pueblo and the surrounding area.The Property was acquired in April 2023 at 85% occupancy, which allowed for the remodeling of units immediately after closing. The Property is expected to be stabilized in Q3 2024, at which point they Sponsor will opportunistically seek a recapitalization event.
Deal Structure:
- $2MM total investment by AVP, 15% coupon for 24 months with 8% current pay and 3% origination fee paid by Sponsor.
- AVP’s investors are projected to receive an 8% preferred return, 13.24% net IRR and 1.26x projected over a 2-year hold period.
- Sponsor expects to increase rents from $1.05/SF pre- renovation to $1.49/SF post-renovation, which is still an 8.1% discount to current market rents of $1.62 currently being achieved (including dated units), this will further increase the ultimate value of the Property at stabilization.
- Upon stabilization, Sponsor plans to refinance the Property to hold for cashflow, or opportunistically sell, either of which scenarios will redeem AVP’s preferred equity investment.
Funded March 2023
$2,000,000
AVP Domino
Preferred equity investment in the development of a 5-story, 223-unit apartment complex located 4 miles from down town Indianapolis, IN, known as The Domino Apartments. The Sponsor acquired the Property in December 2021, broke ground in October 2022, and completed substantial horizontal improvements prior to AVP’s preferred equity investment. The Propertyis expected to be stabilized in 2025; at which point the Sponsor will seek to sell or recapitalize the property.
Funded June 2023
$4,605,000
Deal Structure:
- $4.605MM total preferred equity investment. Eighteen percent (18%) coupon for 24 months. Sponsor pays a 3% origination fee and 9% current pay (paid monthly and first year held in reserves by AVP). Nine percent (9%) accrues and compounds until project is built, stabilized and AVP is taken out as part of a refinance or sale of the Property.
- This investment has a protected basis with step-through provisions and allows for 35% erosion in NOI or 275bps expansion in exit cap rate assumptions for this investment vehicle to not perform as modeled, providing significant downside risk mitigation.
- AVP’s investors are projected to receive an annualized return of 14% per year, of which 8% is to be paid current (paid monthly), and 6% accrues until the investment is exited.
- Total equity multiple of 1.28x over a projected 2-year hold period; if exited early, AVP’s investors will receive a minimum 21% total yield.
- Highly experienced, family-owned Sponsorship, founded in 1990, based in Indianapolis, solely focused on ground-up development of multifamily properties with over 1,700 units in the pipeline with a total capitalization of over $300MM.
- Sponsor invested more than $9MM before AVP’s investment; all of which is subordinated to AVP’s preferred investment.
Fund Execution Experience
Scythian Real Estate Fund
Scythian Real Estate Fund (“SRE”) was a private, open-ended real estate acquisition
fund focused exclusively on acquiring retail and industrial properties leased to sophisticated multi-state cannabis operators. Scythian acquired TRECO holdings (6 properties) and TRECO Portfolio investment (7 properties) in 2019, and then grew to 27 total assets with the fund averaging a 12.3% cap rate on owned assets.
Scythian was sold in an all-cash transaction to Innovative Industrial Properties Inc 9(NYSE: IIPR) for a 7.8% cap (~$75MM) in December 2021. Scythian was a ~$47MM all equity real estate fund that returned a 29.7% IRR and 1.53x equity multiple to LP investors over a 26 month hold period.
