Here is an overview of our 13 step process that we follow as we explore and pursue investment opportunities. Please note that these various 'steps' can and do have a tremendous amount of overlap in actual practice, and sometimes even exhibit fits and starts. However, we believe that by providing this inside glimpse to you, as a prospective investor, you will have a better idea of how our investment process works. Also, although many of these same steps are applicable when we particiipate in an adapative re-use or re-purposing project, that side of our business ~ development ~ will move through the process in a particularly distinct and property specific fashion, based on an assortment of more elaborate factors.
- Market Identification
- Build Team on the Ground
- Sub-Market Target
- Property Screening
- Analyzing Properties
- Contract Phase and Due Diligence
- Select and Train Property Managers
- Implementation of 'Sustainability Plan'
- Oversee the Management of the Property
- Communication with Investors
- Execute Exit Strategy
1. Market Identification
PVP typically focuses on the top 100 MSA's (Metropolitan Statistical Areas of the United States) and within that set of markets, we consider MSA's that have a population between 500,000 and 2,000,000. However, we think that the smaller 'submarkets' within these MSA's or at least those submarkets that are nearby, are compelling environs for our multifamily investments since they are somewhat off the 'grid' and attract less investor attention. We look for stable markets that have demonstrated consistent recession resistant characteristics, a well diversified economy, patterns of future job growth, and a high rating with respect to quality of life issues. We pay special care to whether the markets we explore are in a contractive or expansive phase of their economic business cycle so that we can buy 'right'. PVP strives to establish a presence in any new market with at least 3-4 properties in that market in order to take advantage of economies of scale with respect to operation and management and a sincere desire to become part of the community at large. We then ensure that any market PVP enters has it's fair share of historic properties that provide us with two distinct opportunities: 1) to purchase heritage properties that are already being used as apartment buildings and enhance their value; and, 2) to re-purpose or explore adaptive re-use of historic properties for green multifamily affordable housing, a much more customized process with a unique result.
2. Build Team on the Ground
Once we identify a target market, we begin to identify key stakeholders in that market that will serve the needs of, and support the vision of PVP. These stakeholders typically include both buyers and sellers, active commercial brokers, local lending institutions, interested local investors, local experts in historic properties, property management firms, other property owners, local REI groups, and relevant city officials. Much of what drives PVP is building healthy relationships, and this team building process is critical to our success. Simultaneously, our Sustainability Advisor, Jim Simcoe, begins to research the probable level of a market's receptivity to our 'green retrofit' model and assesses the existing resources (e.g. contractors who understand green building, 3rd party green certification verifiers, etc.) that will enable PVP to accomplish its goals. Also, Sean Carpenter, our Development Advisor, helps us determine the extent to which the creation of, and/or preservation of 'affordable housing' is realistic within our chosen market.
3. Sub-Market Target
Coupled with thorough research and regular visits to our target market, the team building that PVP so carefully conducts enables us to carefully select our sub-markets, parts of town, or neighborhoods that will provide PVP and investors with a more pinpointed opportunity to realize healthy returns on investments. PVP becomes familiar with 'paths of progress', inner city 'revitalization' plans, smart growth and the preservation of historic properties, 'infill' development, local demographics, transportation patterns, and any other aspect of urban planning that may impinge upon the selection of a particular part of the chosen market in which to become a property owner. Naturally, we also pay close attention to the presence of other multifamily properties in our targeted sub-market to determine the viability of our financial goals, and early on, identify what may be obstacles for us in our chosen sub-market.
4. Property Screening
PVP's primary focus lies within the multifamily arena of commercial real estate, although we may, depending on future developments in the commercial real estate market, expand our investments to include self storage, retail, or office commercial space, still functioning within the parameters of our mission and purpose (historic preservation, green, etc.)
Our initial screening process for multifamily properties that do not require 'adaptive re-use' seeks to identify:
- Historic properties that are of 1875 – 1935 vintage
- Apartment complexes with 25 – 75 units;
- Minimum Occupancy of 75% with Positive Cash Flow
- Minimum Capitalization Rate ('CAP') of 8%;
- Investor Cash on Cash Return for Year 1 exceeding 8%;
- Cumulative 5 Year Investor Distributive Cash on Cash Return in excess of 50%;
- Anticipated Enhancement of Property Value at Disposition in excess of 25%;
- Additional Cumulative 5 Year Investor Disposition Cash on Cash Return in excess of 50%;
- IRR Over 5 Year Period in excess of 15%;
- Debt Coverage Ratio (DCR) of 1.6 or greater;
- Motivated Seller if and when possible;
- Component of 'affordable housing' programs present;
- Availability of Seller Financing or Loan Assumption preferred but not required.
In addition to securing listings from both buyers and sellers brokers in our chosen markets, PVP avails itself of the most extensive and professional (and expensive!) commercial databases to conduct property searches, including historic preservation websites, so that we are the ultimate arbiters of what we peruse, including properties that may be listed solely by a property owner and not by a listing broker. If a property qualifies for the next round of scrutiny, PVP moves into a deeper 'analysis' mode and begins to work more closely with a property owner or seller's broker to better assess the property's physical and financial health and determine whether the subject property might be a good candidate for our transformative sustainability plans.
5. Analyzing Properties
PVP strives to achieve strong cash flow and proactively participates in the creation of what we call 'enhanced appreciation' (our variety of 'value add') through our systematic 'green retrofit' process. Thus, when we analyze properties that have come through our property screening process, we want to ensure that PVP can:
- Secure and scrutinize current rent rolls, 2 years of profit & loss statements, and monthly income & expense reports from the past 12 months (trailing);
- Demonstrate that the property can provide immediate positive cash flow from 'actual', not pro forma numbers provided to us by an owner or commercial broker;
- Our Development Advisor, Sean Carpenter, determines whether a particular property has links to various affordable housing programs and historic tax credits, and explores possibilities for government funding in order to preserve and heighten the quality of life for low to moderate income families with children, persons with special needs, and the elderly;
- Determine, under the watch eye and guidance of our Sustainability Advisor, Jim Simcoe, whether there appear to be ample opportunities to profitably 'green up' (See Sustainability Plan section below) the property in accordance with our underlying purpose to create profitable and healthy living environments, in harmony with our preservation goals.
6. Contract Phase and Due Diligence
Although we always retain local attorneys to assist us in our legal work in any market where we conduct business, our Principal, Mitch Genser, was a practicing attorney for a good part of two decades and brings that expertise to any legally binding agreement we enter.
We leave no stone unturned ~ once we are under contract to purchase a multifamily property, PVP goes to work in the due diligence phase and:
- Activates and implements an elaborate checklist containing due diligence in the realm of: finances, building operation, legal and physical matters, third party reports and documentation, and further market analysis;
- Performs careful site inspection with a licensed contractor, our Development Advisor, and our Sustainability Advisor, as we personally inspect the property to identify the immediate, mid term, and long term needs and to expose potential challenges and opportunities that may present themselves to a new owner.
PVP properties are financed in a number of ways that frequently work in concert:
- Large Portion of Funding through Institutional Lenders (usually in the vicinity of 70% – 80% of appraised value);
- Government Funding Programs for 'affordable housing' opportunities and our 'Sustainability Plan';
- State and Federal Historic tax credits may enter into the picture depending upon the extent of the work necessary;
- Assumption of a Mortgage available through the pre-existing lender;
- Seller financing or 'Owner Carry' or 'Take Back Paper' available for a portion of the purchase price;
- Debt Investors – private individuals or companies that effectively 'loan' funds to PVP for a specific period of time and for a specified interest rate return on their investment;
- Equity Investors – individuals or companies that invest money to purchase interests in the ownership in an LLC holding title to the investment property, with the intention to secure quarterly returns on their investment from periodic cash flow distributions, ultimate return of their investment, and a pro rata portion of the enhanced equity at disposition or sale of the property.
If you would like further information about how the PVP investment process works for either a Debt or Equity investor, do visit our 'how to invest' sub-tab under the Investors section. Also, if you would like to discuss whether there is a good investment 'match' between you and Purple Vetch Properties, please take a few minutes to ELECTRONICALLY complete, sign, and submit a short online Potential Investor Questionnaire that will be presented to you. However, if you prefer to download, print, and complete this brief Potential Investor Questionnaire BY HAND, please do so and send it back to us via fax, scan, or ordinary mail. Once we receive the executed Questionnaire, we will follow up with you as soon as possible.
PVP believes that a careful balance between the power of leverage and cash funding must be found on every commercial real estate deal in which we participate.
A strength of our company is thinking out of the box in our negotiations, so that acquisition may be characterized by an assortment of strategies that offer a win – win solution for both buyer and seller. Our Principal's years as a professional mediator certainly comes in handy when it comes to 'Getting to Yes' on acquiring a multifamily property. Fortunately, the challenges associated with this realm of commercial real estate typically are not nearly as emotionally charged as the hotly contested intra-family disputes Mr. Genser regularly helped resolve over the course of his legal and mediation career.
We are very conscious of, and adept at creatively working with an assortment of 'terms' in our acquisition process so that each seller's immediate cash needs, tax implications, or other compelling personal circumstances, may be even-handedly taken into consideration in order to facilitate a fair and ethical commercial real estate closing.
We typically acquire and hold title to multifamily properties in a Limited Liability Company ('ownership' LLC), while the LLC itself is managed by a separate and distinct 'management' LLC in which PVP is at the core. Investors who purchase an interest (Units) become members of the ownership LLC.
9. Select and Train Property Managers
The screening and selection of talented property managers that are most appropriate for the multifamily property that has just been purchased begins long before the actual purchase is made, when PVP is building a team on the 'ground' in a market where we are conducting business. Once we know more about the characteristics and needs of the property we are purchasing, the profile of the tenants, and the type of 'Sustainability Plan' we envision for this property, then, we can make a more thoughtful decision about selecting a property management team most suited for our newly acquired property and train them accordingly. Standard property management functions such as: advertising; marketing; improving the appearance of the property; interviewing prospective residents; collecting rents; dealing with delinquency and evictions; ensuring accurate record keeping; overseeing the usual 'make ready' procedures for apartment units; and implementing 3rd party contracts, to name just a few, of course are always on-going.
PVP's Sustainability Advisor, Jim Simcoe, provides on-site training for each and every property manager, and conducts extensive follow up and provides on-going assistance to our property managers so that they feel extremely comfortable with, and knowledgeable about the 'Sustainability Plan' that will be implemented at the property. PVP Principal Mitch Genser also extends personal training to all property management personnel to ensure that our vision and business purpose is properly transmitted to them, and ultimately to our residents.
10. Implementation of 'Sustainability Plan'
A key element to our business model is enhancing the appreciation of our properties through our 'Sustainability Strategy'. No two people are alike, nor are any two multifamily properties. Therefore, from the moment we begin to screen our properties, we strategize about how a given real estate purchase may be most suited for an enriched green 'Sustainability Plan'.
Once we move beyond the due diligence phase and acquire a property, we are on our way to the creation of a multi-tiered plan to realize our vision. We will always find some low hanging fruit (typically, energy and water related) that are ripe for easy, and inexpensive implementation that begins the process of creating a more healthy living environment for our residents.
However, the buildings themselves, the tenants, occupancy patterns, the condition of the neighborhood, and the availability of local, state, national funding sources and tax credits, and a careful cost / benefit analysis, amongst other variables, will dictate the extensiveness of the 'Sustainability Plan'.
These plans are conducted in phases, and may, in some instances take years to complete. However, from plan inception, PVP is looking for 'payback' windows of 1-3 years to recoup our initial investments in our green retrofits.
An example of a Sample Green Retrofit Study conducted by our Sustainability Advisor, Jim Simcoe, can be found in the PVP Resources tab. When necessary, we also bring in our Architectural Consultant, Lars Langberg, to offer his expertise in shoring up elements of the 'Sustainability Plan' for a particular project.
When appropriate and possible, Purple Vetch Properties may pursue third party 'green' certification for the multifamily project at hand. To learn more about some of the options available to us, and our philosophy about third party green certifications, follow this link to Green Certification under the Resources tab.
11. Oversee the Management of the Property
PVP Principal Mitch Genser oversees the property managers selected to provide property management services for our multifamily properties. Communication between PVP and our property managers is frequent and on-going, characterized by: weekly scheduled phone conferences; periodic site visits, and real time reports that give PVP a running snapshot of the profitability and trends of the multifamily property with respect to occupancies, accounts receivables and payables, expense variances, third party contracts, etc.
In its oversight responsibilities, PVP sets high standards with respect to the following: property 'curb appeal'; grounds maintenance; advertising and marketing for prospective residents; leasing criteria; resident retention; collections, delinquencies and evictions; apartment unit 'make ready' procedures; bookkeeping and banking; and weekly and monthly financial reporting.
Naturally, the implementation of various elements of the 'Sustainability Plan' for the property also fall under the area of property management responsibility ~ all the more reason that our property managers really understand what we are always striving to accomplish with respect to creating healthy living communities through our property specific green sustainable action steps.
PVP has a broad vision of what can be done with and for residents at a multifamily property that is typically not a point of reference for property owners, which may include such things as:
- special after school programs for children
- computer centers
- availability of electric sewing machines
- electric tool sharing programs
- low cost short term availability of apt unit for residents' family members visiting from distant places
- transportation ride / sharing coordination
- unique relationships with local businesses, including local currency
- organic gardening
- incentives to secure free green cleaning supplies
These innovative programs will only be implemented at a multifamily property if the cash flow can justify additional expenditures and if the mere existence of such programs actually enhance resident morale, retention rates, and help maintain high occupancies. The possibilities are limitless, and emerge from the unique needs of a particular property, the special collaboration between management and residents, and what is fiscally responsible for that particular property. Our premise is that people will want to live at a PVP property, because the financial, health and social benefits are so compelling and that this will translate into greater fiscal health for PVP that will, in turn, enable us to be creative in furthering the well-being of our residents.
12. Communication with Investors
Regular and on-going communication with investors is a cornerstone for our investment strategies here at PVP. From the time investors decide to partner with us on a multifamily property until such time as PVP ultimately sells the property, investors are kept up to date about the nature of their investments in four very concrete ways:
- Periodic Executive Written Summaries about the property, in which investors are provided, via email dispatch, with specific information about marketing, leasing and renewal activity, occupancy trends, maintenance issues, 'green' capital projects, and other relevant issues within the context of a financial overview;
- Periodic, Quarterly, and Annual Income Statements that provide investors, via email dispatch, with detail at a more granular level, and assure transparency between investors and PVP;
- Monthly (initially) and then Quarterly Conference Calls (and web meetings when appropriate) to ensure that investors have a regular forum in which to interact with PVP management, ask questions, express concerns, etc;
- Real Time Password Protected Web Based Access to Past and Present Financial Documents pertaining to the investment property, for investors who prefer to have all such documentation organized and sequenced for them, and housed in one place.
We take our responsibility to effectively and honestly communicate with our investors very seriously, and one on one communication with PVP management, when and if necessary, is of course always available to each and every investor as well.
13. Execute Exit Strategy
Generally, PVP is looking to hold a multifamily property for a period of 5 -7 years, at minimum. However, unforeseen circumstances may of course change this general guideline in either direction. As noted above, at the time of disposition or sale, our model dictates that investors receive the return of their initial principal, as well as any pro rata share of enhanced appreciation to which they may be entitled. Partial return of investment funds may accompany a mid ownership property re-finance, but this is determined on a case-by-case basis. The process by which PVP regularly communicates with our investors ensures that any and all exit strategies are fully discussed and explained along the way so that there are no surprises with respect to important decisions such as the disposition of a property.