RealtyMogul successfully exited another multifamily property investment in late March. This was a great accomplishment for both our real estate operating partner (Sponsor) and the RealtyMogul Asset Management team overseeing this investment, especially given the currently volatile market environment surrounding COVID-19.
This investment provides an interesting case study, as it was one where the Sponsor of the project issued a capital call for additional funds during the execution of the business plan. The capital call represented a divergence from the original business plan, including the construction of additional units at the property and additional capital expenditure. Here are the details on the investment:
Original Business Plan
The property was a 210-unit apartment complex located in Burlington, NJ, which was acquired by our Sponsor in late 2017. The original business plan contemplated increasing unit rents after interior unit renovations and exterior improvements to the buildings and amenities. Upon execution of the plan, the property would be positioned for a proposed sale in 2023. Our Sponsor had an extensive portfolio of multifamily property investments in this target market, as well as a robust operational infrastructure including an in-house construction management team.
Execution of Plan and Value Creation
The Sponsor successfully executed on the original business plan, but saw an additional value-add opportunity to convert vacant storage space between buildings into additional studio units. Therefore, in December of 2018, the Sponsor issued a capital call for $228,000 to fund the construction of 18 additional units. It is worth noting that RealtyMogul investors did not participate in the capital call, but rather entered into a member loan agreement with the Sponsor to avoid equity dilution (RealtyMogul investors are normally not subject to capital calls on investments by virtue of stipulations of our Operating Agreement with our Sponsor partners). The member loan would be paid back to the Sponsor at the sale of the property.
Sale of the Property
While capital calls and deviations from an original business plan can certainly be unnerving throughout the course of a real estate investment, RealtyMogul had trust in our Sponsor given their deep track record, market knowledge, and operational expertise.
Our Sponsor successfully followed through with their proposed strategy. The sale of the property occurred two years ahead of the projected exit date.
The successful sale execution of this property investment amidst the COVID-19 crisis is a testament to the strength of our Sponsor partner. RealtyMogul’s onboarding and vetting process for proposed real estate Sponsors is rigorous and thorough. We look for Sponsors with large portfolios and transactional history concentrated in specific property types and markets. We vet and background check the principals and decision makers, and look deeply into their historical property investment performance. We underwrite each transaction ourselves alongside the Sponsor’s proposed underwriting, and visit each and every property before any of our investors’ capital is put to work.
Our confidence in our Sponsor partner translated into confidence in the proposed strategic divergence and ensuing capital call during the investment. While potentially discomforting in short term, the decision ultimately resulted in additional value creation at the property, which benefitted the Sponsor and all RealtyMogul investors. This successful realized sale execution demonstrates what is possible with great Sponsor partners that meet our qualifications. As such, we will continue to focus our efforts on high quality operators and fundamentally sound long-term real estate investments.
All information provided herein should not be relied upon to make an investment decision and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. Investing in private real estate is speculative and involves substantial risks. Prospective investors are recommended to consult with a financial adviser, attorney, accountant, and any other professional that can help you understand and assess the risks associated with any investment opportunity. Past performance is not indicative of future results.