With in-place rents below that of comps, the Property offers significant rental upside via mark-to-market as well as additional renovation potential (10% above in-place). Even after a $10 million renovation budget, proforma rents are still under post-renovated comparable rents by 6%.
The Real Estate Company is highly experienced and acquires properties exclusively in the Washington D.C. area, with over $400 million in multifamily assets acquired and renovated since formation. Because the Principal also owns a construction company, he is able to reduce costs by sourcing materials directly from abroad.
The Property is seven miles from Amazon's proposed HQ2, which is now the sole location since the company cancelled its plans for a second site in Long Island City, NY. Per CoStar and Business Insider, the campus is expected to span 4.1 million square feet and provide 25,000 new jobs at an average salary of $150,000 over the course of 15 years.
Dragone Realty Investments
Dragone Realty Investments (the "Real Estate Company”) is a real estate company that specializes in the acquisition, renovation, and management of multifamily assets in the Washington D.C. Metro. The Real Estate Company is run by President and Founder Vito Dragone, who launched his career at Oxford Realty Financial Group before running acquisitions for ROSS Companies. Since starting the Real Estate Company in 2007, Mr. Dragone has acquired and renovated over $400 million in multifamily assets. Mr. Dragone also owns a construction company which has executed $100 million in renovations over the past 10 years.https://www.dragonerealty.com/
Mr. Dragone is President and Founder of the Real Estate Company. He launched his career at Oxford Realty Financial Group, where he was responsible for special projects, management of Oxford's annual report process that included a "rollup" of 165 investment properties, and development of Excel models to project the operating results and debt and equity returns of each ownership entity. He then ran acquisitions for ROSS companies. Since starting the Real Estate Company in 2007, Mr. Dragone has acquired and renovated over $400 million in multifamily assets. Mr. Dragone also owns his own construction company with $100 million in renovations over the past 10 years. Mr. Dragone operates exclusively within a narrow corridor of the greater Washington D.C. area.
|Property||Location||Asset Type||Acquisition Date||Units||Purchase Price||Sale Price/
|The Milano||Oxon Hill, MD||Multifamily||11/30/2010||305||$10,000,000||$47,275,000|
|Verona at Silver Hill||Suitland, MD||Multifamily||2/22/2007||214||$17,426,000||$37,450,000|
|Verona at District Heights||District Heights, MD||Multifamily||3/27/2019||404||$47,500,000||$70,700,000|
|Verona at the Park||Capital Heights, MD||Multifamily||12/21/2016||272||$24,285,000||$42,160,000|
|Lynnhill Apartments||Temple Hills, MD||Multifamily||3/15/2018||219||$17,050,000||$43,800,000|
|Avanti||District Heights, MD||Multifamily||7/19/2012||930||$58,000,000||$131,000,000|
|Verona at Landover Hills||Landover Hills, MD||Multifamily||2/27/2015||727||$63,000,000||$104,050,000|
The Real Estate Company's bio and track record were provided by the Real Estate Company and have not been verified by RealtyMogul or affiliates.
In this transaction, RealtyMogul investors are to invest in RealtyMogul 129, LLC ("The Company"), which is to subsequently invest in District Heights Fund I, LLC ("The Target"), a limited liability company that will indirectly own interest in the Property. Dragone Realty Investments (the "Real Estate Company") is under contract to purchase the Property for $47.5 million ($117,574 per unit) and the total project cost is expected to be $61.7 million ($152,649 per unit).
The Real Estate Company plans to implement a value-add strategy, in which it will capitalize $10.1 million ($25,070 per unit) to renovate the Property. $5.9 million ($14,556 per unit) has been budgeted for interior unit upgrades which include new cabinets, appliances, granite countertops, vinyl-plank flooring in the kitchens and ceramic in the baths, carpet, two-tone paint with texture, two-panel interior doors, new baseboard molding, upgraded LED lighting fixtures, bathroom vanities with granite, upgraded plumbing fixtures, and new bathtubs and toilets with new ceramic tub surrounds. The interior renovation budget also includes the addition of showers in all 54 half-baths to make them full-baths, and the conversion of the 'den' area of 58 of the two-bedroom floorplans to make them three-bedroom plans. Additionally, $3.1 million has been budgeted for exterior improvements including building hallway upgrades with ceramic tile, resealing and striping the parking lots, upgraded LED lighting, new signage, landscaping, fencing, roof replacements as needed, pool house renovation and new pool furniture, replacing all of the fire hydrants and water supply lines, remodeling the laundry rooms with ceramic tile, painting all of the buildings, new canopies, adding a new fitness center, and controlled access gate at the entrance to the property. Upon stabilization, the Real Estate Company expects to achieve net effective rents of $1,382 per unit, which represents a 10% premium over in-place rents but a 6% discount to the post-reno comps' average rent, according to Axiometrics. The business plan calls for a four year hold, at which point the Property will be sold at a 6.00% cap rate.
Below is a summary of the capital improvements budget:
|CapEx Item||$ Amount||Per Unit|
|Interior Unit Renovations||$5,880,600||$14,556|
|HVAC Condensation Line Repairs||$101,000||$250|
|Underground Pipe Repairs (Dig-ups)||$50,000||$124|
|Unit Door Upgrades||$111,100||$275|
|Storage Room Upgrades||$69,000||$171|
|Building Shell Improvements||$534,000||$1,322|
|Parking Lot (Seal & Stripe)||$125,000||$309|
|Fencing and Signage||$90,000||$223|
|Maintenance/Leasing Golf Carts||$10,000||$25|
|Pool Area Renovations||$100,000||$248|
|Controlled Access Gate at Entrance||$60,000||$149|
|Rebranding Marketing & Collateral||$25,000||$62|
|Total Exterior Improvements||$3,143,500||$7,781|
|Total General Requirements||$353,750||$876|
|Construction Management Fee 5.0%||$468,893||$1,161|
Built in 1963, Verona at District Heights f.k.a. Pennbrooke Station Apartments (the “Property”) is a 404-unit apartment community comprised of one-bedroom (95 units), two-bedroom (285 units), and three-bedroom (24 units) floorplans situated on 18 acres in the Suitland/District Heights/Capitol Heights submarket of the Washington-Arlington-Alexandria MSA. Currently 92% occupied, the Property includes a dog park, playground, pool, and laundry facilities. It is immediately adjacent to Pennsylvania Avenue and 2.7 miles from Route 495. The Property is 7.3 miles from Downtown Washington D.C., 6.8 miles from Ronald Reagan Washington National Airport, and 6.4 miles from the MGM National Harbor Casino and Resort (a $1.5 billion development which opened in 2016 and brought 2,500 jobs to the area). The Property is also only 7.4 miles from Amazon's new HQ2 location in Crystal City, VA. Per CoStar, the new location is projected to bring 25,000 new jobs to the area over the course of 15 years. Within one mile of the Property, there is an ALDI, Marshalls, CVS, Rite Aid, Wells Fargo, Planet Fitness, and several retail and dining options. The Suitland Federal Center and adjacent Town Square redevelopment project are 0.6 miles from the Property.
|Unit Type (In-Place)||Unit Type (Stabilized)||# of Units||% of Total||Unit (Square Feet)||In-Place Rent||Post-Reno Rent|
|1/1 Jr||1/1 Jr||1||0%||700||$1,060||$1,182|
|2/1 Jr||2/1 Jr||52||13%||860||$1,178||$1,292|
|3/1.5 Den||3/2 Den||24||6%||1,150||$1,574||$1,729|
All rents are net effective
|Ashton Heights||Park Greene Apartments||Verona at Silver Hills||Whitehall Square||Averages||Subject (Post-Reno)|
|# of Units||280||349||214||584||357||404|
|Average Rental Rate||$1,522||$1,395||$1,433||$1,535||$1,471||$1,382|
|Distance from Subject||1.9 miles||0.9 miles||1.5 miles||1.3 miles||1.4 miles||
All rents are net effective
|The District||Princeton Estates||Marlow Garden||Raleigh Court||Averages||Subject|
|Date||Oct '18||Oct '17||Feb '18||Jun '18||--||--|
|# of Units||427||474||256||99||314||404|
|Distance from Subject||1.7 miles||2.6 miles||2.1 miles||2.8 miles||2.3 miles||--|
Sale and lease comps were obtained from CoStar and Axiometrics
Per CoStar, the long-term potential across the Washington D.C. market is enormous, with Amazon CEO Jeff Bezos announcing that Crystal City would be the sole location for Amazon's new HQ2. Over the course of 15 years, the company is expected to hire 25,000 employees at the site at an average wage of $150,000. This move will likely keep multifamily construction, demand, and occupancy up for the foreseeable future. Even before the Amazon announcement, Washington D.C. was undergoing one of the largest multifamily expansions in the country (ranking only behind New York and Dallas-Fort Worth for the most units built this cycle). Despite this, the vacancy rate has held firm in most of the metro due to costly homeownership, strong renter household formation, and a healthy job market.
Per Axiometrics, effective rent decreased 0.8% from $1,747 in 3Q18 to $1,733 in 4Q18; even so, annual effective rent growth was 1.6% in 2018. Annual effective rent growth is forecast to be 2.4% in 2019, and average 2.0% from 2020 to 2022. Annual effective rent growth has averaged 3.0% since 1Q95. The market's annual rent growth rate was above the national average of 2.5%. The market's occupancy rate decreased from 96.0% in 3Q18 to 95.5% in 4Q18, and was up from 95.2% a year ago. For the forecast period, the market's occupancy rate is expected to be 95.4% in 2019, and average 94.9% from 2020 to 2022. The market's occupancy rate has averaged 95.6% since 1Q95.
Per CoStar, the D.C. Metro's job centers are accessible from the submarket via Metro's green line, I-495, and Branch and Pennsylvania Avenues, which drove a decline in submarket vacancies in 2015 and 2016. The local job market consists primarily of state government entities and lower-paying retail employment, which explains why the submarket has one of the metro's lower median household incomes. The General Services Admission (GSA) selected this submarket for the new U.S. Citizenship and Immigration Services headquarters, which is expected to bring about 3,700 employees when the agency moves in 2019 and should lift the local demographics.
In November 2017, construction began on Town Square at Suitland Federal Center, which is set to be the largest redevelopment project in Prince George's County history and only 0.6 miles from the Property. The one-million-square-foot mixed-use development will include nearly 900 apartments and single family homes, 100,000 square feet of retail space, and a 50,000-square-foot performing arts center. The project will be completed in three phases and is expected to create 1,200 construction jobs.
Per Axiometrics, effective rent decreased 0.2% from $1,372 in 3Q18 to $1,370 in 4Q18. The submarket's annual rent growth rate of 3.0% was above the market average of 1.6% in 2018. Annual effective rent growth is forecast to be 3.3% in 2019, and average 2.9% from 2020 to 2022. The annual effective rent growth has averaged 3.1% per year since 2Q01. The submarket's occupancy rate decreased from 95.6% in 3Q18 to 94.5% in 4Q18, and was down from 95.1% a year ago. The submarket's occupancy rate was below the market average of 95.5% in 4Q18. For the forecast period, the submarket's occupancy rate is expected to decrease slightly to 94.2% in 2019 and average 93.8% from 2020 to 2022. The submarket's occupancy rate has averaged 94.8% since 2Q98.
|1 Mile||3 Miles||5 Miles|
|Median Household Income||$58,830||$57,589||$56,040|
|Average Household Size||2.4||2.5||2.5|
|Median Home Value||$211,822||$240,217||$260,949|
|Population Growth 2018-2023||2.21%||4.26%||5.08%|
Demographic information above was obtained from CoStar.
|Sources of Funds||Cost|
|Total Sources of Funds||$61,670,000|
|Uses of Funds||Cost|
|Real Estate Company Acquisition Fee||$500,000|
|Warren Private Clients Acquisition Fee||$350,000|
|Broker Dealer Fee||$80,000|
|Interest Rate Cap||$100,000|
|Total Uses of Funds||$61,670,000|
A portion of Real Estate Company equity may come from family and friends
The expected terms of the debt financing are as follows:
- Lender: PCCP
- Estimated Proceeds: $48,600,000
- Estimated Rate (Floating): One Month Libor plus 3.35%
- Amortization: 30 years
- Term: 4 years
- Interest Only: 4 years
- Prepayment Penalty: None
- Extension Options: One one-year extension option (0.25% fee)
There can be no assurance that a lender will provide debt on the rates and terms noted above, or at all. All rates and terms of the debt financing are subject to lender approval, including but not limited to possible increases in capital reserve requirements for funds to be held in a lender controlled capital reserve account.
The Target will make distributions to investors (The Company and Real Estate Company, collectively, the "Members") as follows:
Operating Income, Refinance, and Sales Proceeds
- To the Members, pari passu, all excess operating cash flows to a 10.0% IRR to the Members;
- 90.0% / 10.0% (90.0% to Members / 10.0% to Real Estate Company) of excess cash flow and appreciation thereafter.
- 100% to RealtyMogul 129, LLC investors to an 8.0% IRR;
- 70.0% / 30.0% (70.0% to RealtyMogul 129, LLC investors / 30.0% to RM Manager) of excess operating cash flows to a 12.0% IRR;
- 60.0% / 40.0% (60.0% to RealtyMogul 129, LLC investors / 40.0% to RM Manager) of excess cash flow and appreciation thereafter.
Note that these distributions will occur after the payment of the Company's liabilities (loan payments, operating expenses and other fees as set forth in the LLC agreement, in addition to any member loans or returns due on member loans).
The manager of The Company may receive a portion of the promote. Distributions are expected to start in September 2019 and are projected to continue on a quarterly basis thereafter. These distributions are at the discretion of the Real Estate Company, who may decide to delay distributions for any reason, including maintenance or capital reserves.
|Year 1||Year 2||Year 3||Year 4|
|Effective Gross Revenue||$5,984,219||$6,352,691||$7,000,692||$7,387,170|
|Total Operating Expenses||$2,784,081||$2,880,446||$2,987,114||$3,078,388|
|Net Operating Income||$3,200,138||$3,472,245||$4,013,578||$4,308,782|
|Distributions to RealtyMogul 129, LLC Investors||($2,020,000)||$55,847||$59,912||$120,637||$175,196||$3,125,352|
|Net Earnings to Investor
- Hypothetical $50,000 Investment
Certain fees and compensation will be paid over the life of the transaction. The following fees and compensation will be paid:
|Type of Fee||Amount of Fee||Received By||Paid From||Notes|
|Acquisition Fee||$500,000||Real Estate Company||Capitalized Equity Contribution||1.05% of the Property purchase price|
|Acquisition Fee||$350,000||Warren Private Clients||Capitalized Equity Contribution||0.74% of the Property purchase price|
|Broker-Dealer Fee||$80,000||North Capital||Capitalized Equity Contribution||Greater of $50,000 and 4.0% of the equity raised by RealtyMogul 129, LLC|
|Construction Management Fee||5.0% of costs||Real Estate Company||Capitalized Equity Contribution|
|Disposition Fee||$400,000||Warren Private Clients||Distributable Cash||Fee is subordinate to a full return of equity|
|Type of Fee||Amount of Fee||Received By||Paid From||Notes|
|Management and Administrative Fee||1.25% of amount invested in RealtyMogul 129, LLC||RM Manager, LLC||Distributable Cash||RM Manager, LLC is the Manager of RealtyMogul 129, LLC and a wholly-owned subsidiary of Realty Mogul, Co. (2)|
|Asset Management Fee||1.0% of Effective Gross Income||Real Estate Company||Distributable Cash||Subject to $5,000 per month minimum|
|Asset Management Fee||$30,000 per year||Warren Private Clients||Distributable Cash||Fee is subject to 3% annual increases|
|Property Management Fee||3.0% of Effective Gross Income||WestCorp Management Group||Distributable Cash|
(1) Certain employees of Realty Mogul, Co. are registered representatives of, and are paid commissions by, North Capital Private Securities Corp., a Delaware corporation ("North Capital"). In addition, North Capital pays a technology provider services fee to Realty Mogul, Co. for licensing and access to certain technology, reporting, communications, branding, entity formation and administrative services performed from time to time by Realty Mogul, Co., and North Capital and Realty Mogul, Co. are parties to a profit sharing arrangement.
(2) Fees may be deferred to reduce impact to investor distributions.
The above presentation is based upon information supplied by the Real Estate Company or others. Realty Mogul, Co., RM Manager, LLC, and The Company, along with their respective affiliates, officers, directors or representatives (the "RM Parties") hereby advise you that none of them has independently confirmed or verified any of the information contained herein. The RM Parties further make no representations as to the accuracy or completeness of any such information and undertake no obligation now or in the future to update or correct this presentation or any information contained herein.
Investors should not rely on any forward-looking statements made regarding this opportunity, because such statements are inherently uncertain and involve risks. We use words such as “anticipated”, “projected”, “forecasted”, “estimated”, “prospective”, “believes”, “expects”, “plans”, “future”, “intends”, “should”, “can”, “could”, “might”, “potential”, “continue”, “may”, “will” and similar expressions to identify these forward-looking statements.
Non-Transferability of Securities
The transferability of membership interests in The Company are restricted both by the operating agreement for that entity and by U.S. federal and state securities laws. In general, investors will not be able to sell or transfer their interests. There is also no public market for the investment interests and none is expected to be available in the future. Moreover, the estimated investment holding period described herein is only a projection, and there can be no assurance when or if an investment may be liquidated. Persons should not invest if they require any of their investment to be liquid. This is particularly important for persons of retirement age, who should plan carefully to assure that their assets last throughout retirement.
Capital Call Risk
The amount of capital that may be required by the Target from the Company is unknown, and although the Target does not require that the Company and its members contribute additional capital to it, it may from time to time request additional funds in the form of loans or sell additional equity. The Company does not intend to participate in a capital call if one is requested by the Target, and in such event the manager of the Target may accept additional contributions from other members of Target or from new members. In the event that the manager of Target advances any capital on behalf of the Company, it will be deemed to be a manager loan at an interest rate that cannot be determined at this time. Amounts that are contributed by existing or new members will be deemed to be additional capital contributions, in which case the Company's interest in Target will potentially suffer a proportionate amount of dilution.
All funds from investors will be held in a non-interest-bearing escrow account with Broker-Dealer as escrow agent for the benefit of the investors in accordance with Rule 15c2-4 under the Exchange Act. All investor funds will be transmitted directly by wire or electronic funds transfer via ACH to the escrow account maintained by the escrow agent per the instructions in the Subscription Agreement. Upon certification by Broker-Dealer and acceptance by the Company that all contingencies have been met, the investor’s funds will be promptly transmitted to the Company. If the contingencies fail to be satisfied during the offering period, we will instruct the Broker-Dealer to return all funds to the investors without interest, deduction, or setoff, and all of the obligations of the investor hereunder shall terminate.
Floating Interest Rate
The loan being used to acquire the Property is expected to have a floating rate based on the London Interbank Offered Rate (“LIBOR”). If LIBOR increases the interest payments due on the loan are expected to increase as well. This could adversely affect the Property’s financial results or business operations and thus the value of the Company’s investment.
Apartment Complex - Competition
Competition in the Property’s local market area is significant and may affect the Property’s occupancy levels, rental rates and operating expenses. The Property will compete with other residential alternatives to attract tenants, including but not limited to other apartment units that are currently available for rent, new apartments that are built and condominiums/houses that are for rent or sale. If development of apartment complexes by other operators were to increase, due to increases in availability of funds for investment or other reasons, then competition with the Property could intensify. If the Property is not able to successfully compete with the competitive residential alternatives in the local or regional area this could adversely affect the ability of Target Entity to sell the Property, rent its units as necessary to maintain occupancy, and/or to increase or maintain unit rental rates.
The Property was 92% occupied as of February 2019, and the Target intends to implement a capital improvement plan involving the interior and exterior renovation of the Property, and a leasing program in its effort to add value to the Property. The Target intends to renovate all or some of the units within the Property and increase the current rental rates of such renovated units. There can be no assurance that, (i) the renovations will be consummated on a timely basis, (ii) the renovations will be completed satisfactorily, (iii) such work will not materially adversely affect other aspects of the operation of the Property, and (iv) the planned rental rate increase will have favorable results to meet the goals the Target projected. Any delays or negative results of the renovation work or rental increase efforts could adversely affect the Property’s financial results or occupancy levels, including its business operations and thus the value of the Company’s investment.
The above is not intended to be a full discussion of all the risks of this investment. Please see the Risk Factors in the Issuer Document Package for a discussion of additional risks. The above presentation is based upon information supplied by the Real Estate Company and others. Realty Mogul, Co., RM Manager, LLC, and The Company, along with their respective affiliates, officers, directors or representatives (the "RM Parties") hereby advise you that none of them has independently confirmed or verified any of the information contained herein. The RM Parties further make no representations as to the accuracy or completeness of any such information and undertake no obligation now or in the future to update or correct this presentation or any information contained herein.
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