Sioux Falls Multifamily Portfolio


Sioux Falls Multifamily Portfolio

Targeted Internal Rate of Return: 12-14%
Targeted Equity Multiple: 1.60x-2.00x
Target Hold Period: 3-5 years
Investment Type: Equity
Property Type: Multifamily




Project Overview


Sioux Falls Multifamily Portfolio

ArborCrowd Manager VIII, LLC (“ArborCrowd”) is pleased to present investors with the opportunity to participate in the value-add repositioning of the Sioux Falls Multifamily Portfolio in Sioux Falls, SD (the “Portfolio” or the “Property”). This is an opportunity to own equity interest in a portfolio of properties that exhibit strong upside potential in a market with tremendous multifamily real estate fundamentals. The Property was acquired in October 2018 by affiliates of Tzadik Management, which is led by Adam Hendry (the “Sponsor”). An ArborCrowd affiliate invested in the Portfolio in January 2019. Investors now have the opportunity to be a part of this transaction.

The Portfolio

The Portfolio consists of 707 Class-B units spread across 18 properties (collectively, the “Properties”) located throughout the city of Sioux Falls, the fourth fastest growing metro economy in the United States.1 The Portfolio benefits from amenities, which include playgrounds, controlled access, private patios and decks, and common area laundry. The Properties are all in close proximity to the city's various public parks, which have pools, dog parks, bike trails, and tennis and basketball courts. Additionally, the Properties are all within 10 miles of one another, enabling the Sponsor’s management team to reach each of the Properties in under 15 minutes from anywhere in the city.

SOUND MARKET FUNDAMENTALS

  • Population Growth: The Sioux Falls metro area had an estimated population of 264,552 in 2018, which is a 17.4% increase since 2010.2 It is projected to add another 20,000 people by 2023.3
  • Strong Employment: The Sioux Falls metro area unemployment rate is currently 2.5%, which is well below the national rate of 4%. The MSA features strong median household income of $67,500, which is higher than the national median household income of $57,652. Over the next five years, the MSA’s median household income is expected to increase by 14.2%, or $1,716 per annum.2,3,4
  • Macroeconomic Insulation: During the Great Recession, Sioux Falls’ economy fared well despite the harsh realities of the global downturn. When the national unemployment rate peaked at 10% in October 2009, it was just 4.7% in Sioux Falls.6
  • Market Diversity: Sioux Falls’ economy is not reliant on any one sector. The largest industry in the area is healthcare, which accounts for 20% of the workforce, while retail, manufacturing, and finance each account for approximately 10% of the workforce.2,4

1: Bureau of Economic Analysis 2: U.S. Census Bureau 3: Experian Marketing Solutions 4: U.S. Bureau of Labor Statistics 5: Moody’s 6: CoStar

Investment Overview


The business plan encompasses capitalizing on 18 properties acquired from 4 different non-institutional owners at a favorable basis relative to the market and combining these properties into a single institutionally run portfolio. The Portfolio, amassed in 4 simultaneous transactions, represents nearly 4% of Sioux Falls’ total apartment inventory. The Sponsor aims to increase the Portfolio’s rental income through a comprehensive capital expenditure plan and by improving overall operations by bringing all Properties under one managerial umbrella.

To execute this strategy, the Sponsor will implement its institutional property management infrastructure throughout the Portfolio in order to better market the properties, improve the leasing process, and generate operational economies of scale. Additionally, the Sponsor has budgeted approximately $5.2 million to renovate all 707 apartments and improve the Portfolio’s curb appeal by enhancing building exteriors and common areas. The Sponsor anticipates that the operational improvements and renovations are expected to create a recognizable brand to appeal to residents throughout the Sioux Falls marketplace and can generate an average monthly rental premium of over $100 per unit, resulting in a significant potential return on investment. Highlights of the investment opportunity include:

  • Professional Management:  Historically, these Properties were operated separately by smaller non-institutional owners. By bringing the 18 properties under one managerial umbrella the Sponsor will create economies of scale throughout the Portfolio as operating expenses will be shared by all of the Properties. Additionally, the Sponsor expects to improve leasing volume and foster an improved tenant experience, which it anticipates will lead to increased renewals and higher rents.
  • Value-Add Opportunity: Approximately $2.1 million ($2,800/unit) is expected to be spent on renovating the Portfolio’s apartments as they turnover and approximately $3.1 million will be spent to improve the Portfolio’s common areas and public spaces. As the Portfolio was purchased from local owners, who have held the Properties for many years, the Properties are in need of this work in order to achieve their full rental potential.
  • Proven Plan: This is the Sponsor’s third portfolio transaction with a similar investment strategy. In the Daytona Beach, FL metro area and the Atlanta, GA metro area, the Sponsor quickly acquired large portfolios (Daytona Beach 1,200+ units and Atlanta 1,000+ units) and successfully executed a very similar value-add business plan.

Property Overview


1: Does not include project management, contingency, and immediate deferred maintenance required by lender.

2: As of February 2019

1: Does not include project management, contingency, and immediate deferred maintenance required by lender.

2: As of February 2019

1: Does not include project management, contingency, and immediate deferred maintenance required by lender.

2: As of February 2019

Business Plan


The expected hold period for the Sioux Falls Multifamily Portfolio is between 3 and 5 years.

One of the core drivers of the business plan is to bring the Properties under one managerial umbrella to vastly improve the Portfolio ’s operations and create an identifiable and appealing brand in Sioux Falls. Historically, the Properties were managed by non-institutional owners and as is typical in these situations, the owners were not focused on strategically expanding the net operating income. Rather, they focused on keeping occupancy high and expenses low in order to generate reliable cash flow. This strategy, however, ignores a lot of upside value attributable to renovated units and professional management.

The Sponsor and its affiliates own and manage over 6,000 units across the country and utilize a strategy that involves increasing net operating income by improving the physical appearance of Properties and enhancing management operations with a professional local staff. Prior to the Portfolio’s acquisition, Tzadik recruited a local real estate management staff with experience in the Sioux Falls market. As a result, they were able to quickly commence renovations and the repositioning strategy. Effective property management requires a multi-disciplinary approach, and the following disciplines will be employed by Tzadik across the Portfolio:

An additional component of the business plan is to improve the exterior and common areas of the entire Portfolio, creating a heightened level of amenities of strong value when compared to the market.

$5.2 million renovation budget to overhaul the appearance of the Portfolio’s exterior and common areas. These improvements are expected to elevate the quality of life for residents and create a recognized brand to appeal to residents throughout the Sioux Falls marketplace.

The scope of the exterior and common area renovations will last approximately 24 months and includes:

  • Mechanical, electrical and plumbing work as well as heating, ventilation and air conditioning upgrades will be completed as needed so buildings operate efficiently across the Portfolio.
  • Landscaping, common area lighting and signage will be upgraded to enhance the Portfolio’s aesthetic value.
  • Replacing or repairing roofs where needed.
  • Repairs to stairwells, sidewalks, sidings, patios and balconies will be completed throughout the Portfolio.
  • Parking lots and garages will be repaired.
  • On-site playgrounds at properties will be refurbished to ensure tenants have family-friendly amenities.

The final component of the business plan is to upgrade the Portfolio’s units with finishes above the standard of units in comparable properties in the marketplace. As a result, the Portfolio’s units are expected to garner more appeal from prospective tenants and rent at higher rates than rents in place at acquisition.

The Sponsor’s approximately $2.1 million ($2,800/unit) renovation effort will address specific needs of each of the Portfolio’s 707 units. The renovations are expected to capitalize on the lack of updated, yet reasonably-priced rentals in the Sioux Falls Marketplace. As a result of the interior upgrades, the exterior improvements and implementation of the professional management infrastructure, the Sponsor anticipates this suite of improvements will result in an average rental premium of over $100 per month.

The Sponsor expects to perform the renovations as units are vacated by tenants. The renovation plan highlights include:

  • Installing new appliances, fixtures, cabinetry, lighting, flooring, vanity and sinks, and tubs where needed.
  • Fresh paint in all units as they turnover.
  • Cohesive interior aesthetic throughout the entire Portfolio.
  • Anticipated completion within 24 – 30 months.

The Sponsor intends to replicate the renovation strategies it employed in the Daytona Beach and Atlanta metro areas, where it entered those markets and quickly acquired 1,000+ units in each. In both transactions, the Sponsor substantially created value by delivering physical improvements and professional management throughout each portfolio. The Daytona Beach metro area portfolio was refinanced only 15 months after acquisition and returned 25% of equity back to investors. The Atlanta metro area portfolio is in the process of being refinanced and the Sponsor expects to return a substantial amount of capital to investors.

The planned unit renovations at the Portfolio will result in improved finishes compared to units at comparable properties, while post- renovation projected rents on average will be more reasonably priced than many competitors.1 The images below highlight the difference in quality, appearance, and rents between the Portfolio’s pre- and post-renovation units.

1: Units at competitive properties such as Beadle West, Carmel Estates, and Terrace Hills have inferior interiors compared to planned upgrades at the Portfolio.

2: These are actual images taken from units in the renovation process at Eagle’s Nest, River Run, and Arnold’s Park.

3: These are actual images of renovated units at Eagle’s Nest, River Run, and Arnold’s Park. The Sponsor plans to deliver a similar aesthetic to most of the units across the Portfolio.

In August 2016, affiliates of the Sponsor acquired 1,244 Class-B units in the Daytona Beach, FL metro area. The Sponsor had no prior foothold in the market but recognized the opportunity to capitalize on non-institutionally owned properties with below- market rents and low occupancies relative to similar properties in the area. The Sponsor executed 6 simultaneous transactions collateralized by one bridge loan to complete the acquisition.

Prior to the closing date, the Sponsor already assembled a local management team by successfully attracting top local real estate professionals, which allowed the extensive renovation and capital expenditure plan to commence immediately. Additionally, the Sponsor implemented operating efficiencies and professional management services, and improved the net operating income of the portfolio. In just 15 months, the Sponsor successfully completed a refinance of the acquisition bridge loan with a new loan at a lower interest rate and returned nearly 25% of investors’ capital (approximately $4.5 million). Currently, the portfolio’s average occupancy is 96% and average rents have increased by over $100 since the purchase date. 1

Following the success in the Daytona Beach area, the Sponsor identified 1,016 Class-B units in the Atlanta, GA metro area where it could employ a similar business plan. In April 2018, affiliates of the Sponsor acquired 6 properties collateralized by one bridge loan from Arbor. The Sponsor once again assembled a team with local market experience, and it immediately began implementing its property management infrastructure and commissioning a large-scale renovation effort throughout the portfolio.

To date, approximately 66% of the capital expenditure budget has been utilized, and the portfolio is already exhibiting positive results.1 Occupancy has increased from 85% to 95%, and rents have risen over 9% from in-place rents at the time of acquisition.

The Sponsor is in the process of refinancing its acquisition loan, and it anticipates that when the refinance is completed, a significant amount of equity will be returned to investors in less that 2 years.

1: As of February 2019.

Financial Analysis


1:Reflects projected rents when renovations/capital expenditures are completed (appx. 24-30 months), while competitive set average rents reflect rents as of Jan. 2019 and do not take into account yearly market rent growth that is anticipated to occur during the 24-30 month period.    2: Deer Ridge, Windsor Heights, Ridgeview, and Carmel Estates have had recent improvements.   3: Comparable rates were provided by property data websites REIS and CoStar, and subsequently verified by ArborCrowd through market surveys.   4: Deer Ridge's year built could not be determined.

1: Based on comparable set reflected on this page.2: Cushman & Wakefield 3: Transactions listed are selected similar competitive Class-B apartment sales in the market. The table is not to be interpreted as an exhaustive list of every apartment property that has traded in Sioux Falls over the past 9 years as it does not include some transactions that ArborCrowd, in its sole discretion, deems uncompetitive. 4: Real Capital Analytics, CoStar, REIS, Argus Leader, and CBRE

Market Overview


The Sioux Falls metro area is one of the fastest growing MSA’s in the country due to a diverse and strong mix of employment opportunities. It boasts a population growth rate that is nearly double the national average.

  • population
    • The Sioux Falls metro area has a population of 264,552 and is projected to add another 20,000 people by 2023.1
  • Fast Facts:2
    • Median Age: 35 Years
    • Median Property Value: $181,048
    • Workforce: 142,354
  • Employment
    • Major Industries: Healthcare, Retail, Manufacturing, and Finance.3
    • Unemployment Rate: The unemployment rate is 2.5% and has remained under 4% since 2012.3
    • Industry Diversification: Sioux Falls features a robust and diverse mix of industries, insulating the local economy as the city is not reliant on any single sector. No industry alone is more than 20% of the total economy.3
    • Business Friendly: Many startups and small businesses are opening locations in Sioux Falls to take advantage of various tax benefits, including no state, corporate or personal income tax, and no inheritance tax.4
    • Educated Workforce: Over 33% of the workforce has a 4-year degree, while over 91% has a high school degree – both above national averages.4, 5

1: U.S. Census Bureau and Experian Marketing Solutions 2: Data USA

3: U.S. Bureau of Labor Statistics 4: Sioux Falls Development Foundation 5: US Census Bureau

The economy of the Sioux Falls metro area is largely driven by the healthcare, retail, manufacturing, and finance industries.

Household Income

Within a 5-mile radius of the center of Sioux Falls, which includes all 18 Properties,1 the annual median income is $60,688.

  • As a rule of thumb, reasonably affordable rent is considered approximately 30% of pre-tax income.2 Taking this into account, on average the post-renovation rents at the Property should be considered well-priced and affordable within the market.

Renting vs. Buying

Assuming a 20% down payment for the median-priced single-family home in the area, renting may make more economic sense, especially as home values in Sioux Falls have increased more than 5% per year over the past 3 years.3

  • An average down payment of approximately $36,000 to $46,000 creates a barrier of entry to homeownership when considering area incomes.4
  • Monthly median homeownership costs are estimated at $1,276 in the Sioux Falls metro area,5 which may be challenging for some as home prices and interest rates continue to rise.6

1: Radius measured from Summit Apartments, which is located 0.5 miles from the center of Sioux Falls

2: Nasdaq: How Much Home Can You Afford?

3: Data USA

4: Data USA Sioux Falls metro area median property value of $181,000

5: U.S. Census Bureau

6: Comparing monthly rent to the typical homeowner’s monthly overhead of principal, interest, maintenance, insurance, and property taxes

Sioux Falls MSA’s notable employment highlights:

  • Sioux Falls has a growing workforce with approximately 2% average year-over-year job growth from 2008 to 2018. Roughly 27,000 jobs have been added in the marketplace since unemployment peaked in 2009 during the Great Recession, and job growth is projected to continue at an estimated 1,800 jobs per year.1, 2
  • Sioux Falls garnered the top spot in Forbes’ “Best Small Places for Business and Careers” for 2017 and 2018.3
  • The $174 million-Avera on Louise Specialty Campus, which will bring advanced surgical healthcare to Sioux Falls, is expected to open in 2020. The 89-acre project is expected to produce over 1,200 construction jobs and 500 permanent jobs.4, 5
  • Sanford Health, Sioux Falls’ largest employer, continues to expand in the region. The institution is adding 4 new medical buildings for which construction is slated to begin this year.6

Source: U.S. Bureau of Labor Statistics

1: Moody’s 2: Sioux Falls Development Foundation 3: Forbes 4: Avera.org 5: KSFY, an ABC Affiliate 6: Argus Leader

Demand

Average asking rents in the Sioux Falls MSA have risen consistently since 2012 and are expected to continue trending upward.1 Due to developers building new Class-A apartments, average vacancy in the market has increased in the past few years. However, the new Class-A product, which has higher rents relative to the market average, is bearing the brunt of these vacancies. Buildings constructed after 2009 have an average vacancy rate of over 14%, as these newer properties with higher rents are experiencing long lease-up periods.2 On the other hand, Class-B 1970s – 90s apartments such as those in the Portfolio currently have an average vacancy rate of 5.1%.2

Supply

There are approximately 2,000 units currently in planning or under construction in the Sioux Falls MSA. This is a positive indicator for the multifamily market as new capital should continue to flow into the region. Additionally, as new construction is typically marketed at premium rents, the Sponsor believes the increase in new developments could further expand the appeal for the Portfolio’s upgraded units, which will offer quality apartments at a more economical price point. For example, projects built in the last 10 years have average asking rents of more than $1,016 per month, while the Sponsor projects post-renovation average monthly rents across the Portfolio to be $826.2

1: CoStar

2: REIS

The Great Recession spanned approximately 19 months, starting from December 2007 and ending in June 2009.

Since the Great Recession ended, the country’s economy has been steadily growing, but markets are cyclical and eventually a market correction will occur.

Taking this into account, the Sponsor actively sought out a market that historically was insulated from market downturns but where real estate purchase prices were not overpriced. Through research and trips to various markets across the country, the Sponsor discovered Sioux Falls and its strong real estate fundamentals: healthy population growth, low unemployment, and a local economy that was not reliant on any single industry.

During the Great Recession, Sioux Falls exhibited resiliency compared to the impact felt around the nation:

  • When the national unemployment rate peaked at 10% in October 2009, Sioux Falls’ unemployment rate was just 4.7%.1
  • The vacancy rate for multifamily properties in Sioux Falls barely moved during the Great Recession and remained around 9%, providing consistent cash flow to real estate owners.2
  • Average multifamily rents remained stable during the downturn and began climbing steadily in 2011.2

1: U.S. Bureau of Labor Statistics

2: CoStar

Sponsor and Manager


ArborCrowd is the first real estate crowdfunding platform to be launched by a real estate institution, opening an exclusive network to a new class of investors.

As part of The Arbor Family of Companies, which includes Arbor Realty Trust (NYSE: ABR), a leading publicly traded commercial mortgage real estate investment trust, ArborCrowd is backed by more than 30 years of leadership experience.

ArborCrowd reviews more than 500 deals a year from its proprietary network and only chooses the ones that survive its rigorous underwriting process.

ArborCrowd commits capital to a deal prior to launching the offering to investors. This ensures the deal closes and allows ArborCrowd to offer investors accurate and detailed information about the property.

Additionally, ArborCrowd chooses to present one deal at a time, so there is no guessing what property investors will actually own.


Ivan Kaufman | Co-Founder & CEO

Ivan Kaufman is a Co-Founder and the CEO of ArborCrowd. He is also the Chairman and CEO of Arbor Management Acquisition Company (AMAC).

Kaufman has extensive experience operating a diverse array of real estate finance companies that spans four decades and numerous real estate cycles. He is currently the Founder, Chairman, President and CEO of Arbor Realty Trust, Inc. (NYSE: ABR), a leading multifamily and commercial real estate lender and real estate investment trust that became publicly traded in April 2004.

In addition, Kaufman is the Founder and CEO of Arbor Commercial Mortgage, LLC, a multifamily finance company he established in 1995. In 2016, Arbor Realty Trust formally acquired the agency lending platform of Arbor Commercial Mortgage.


Adam Kaufman | Co-Founder & Managing Director

Adam Kaufman is a Co-Founder and the Managing Director of ArborCrowd. In this role, he oversees ArborCrowd’s corporate growth strategy.

By leveraging his knowledge of real estate and his earlier work experience at one of the country’s leading digital marketing and technology companies, Adam established ArborCrowd to provide investors with an unprecedented opportunity to co-invest alongside experts in institutional real estate.

In 2018, Adam was selected to Commercial Observer’s “Top 25 Debt and Equity Professionals Under 35,” and he was named to New York Real Estate Journal’s “Ones to Watch.” He is a Forbes Real Estate Council member and has spoken at various prestigious institutions, including The Wharton School, Harvard University and Columbia Business School. Adam is a graduate of the University of Pennsylvania, who has served within the U.S. Senate Committee on Foreign Relations.

Tzadik Management (“Tzadik”), founded by Adam Hendry in 2007, is a real estate and property management company based in Miami, FL. Currently, Tzadik and its affiliates own and/or operate more than 6,000 units in Florida, Georgia, Texas and South Dakota.

Tzadik has executed several successful value-add strategies by acquiring large multifamily portfolio’s with untapped potential and introducing physical upgrades and property management efficiencies to extract value for investors. Tzadik seeks out markets that exhibit sound fundamentals that have yet to become a target of institutional capital. This allows Tzadik to access the market before it becomes overpriced, thereby achieving strong returns for its investors.

Tzadik and its affiliates have obtained loans from Arbor Realty Trust, Inc. and its affiliates to acquire nearly 2,000 multifamily units in various states.

PROVEN TRACK RECORD

  • Purchased over 50 apartment properties with a total acquisition value in excess of $300 million.
  • Currently owns and operates 46 properties with over 6,000 units in Florida, Texas, Georgia, and South Dakota.1
  • Transactions with similar strategies in other markets have been performing well for Tzadik’s investors.
  • Tzadik and its affiliates are repeat borrowers of Arbor.

1: As of February 2019

2: Cost basis is the sum of the purchase price and capital expenditure budget for the Sponsor’s acquisitions.


Adam Hendry | Founder & CEO

Adam Hendry is the Founder and CEO of Tzadik Management, a real estate and property management company based in Miami, FL. Adam has nearly 15 years of management experience in the real estate and property management industry.

Currently, Tzadik and its affiliates own and/or operate more than 6,000 units in Florida, Georgia, Texas and South Dakota. It’s portfolio is valued at an estimated $435 million and the company has 175 employees.

Tzadik focuses on value-add strategies in which they acquire large multifamily portfolios with untapped potential and introduce upgrades and property management efficiencies to extract value.

Adam is a graduate of the University of Florida, where he earned a Bachelor of Science degree in business administration, economics and finance.


1: Acquired by Tzadik and its affiliates

2: As of February 2019

1: Acquired by Tzadik and its affiliates

2: As of February 2019

1: Acquired by Tzadik and its affiliates

2: The projects listed above include multifamily investments the Sponsor has acquired in the last 10 years.