New Funds Fuel Investment on Crittenden

About two weeks ago I was contacted by Cindy Tullues the reporter for Crittenden who publishes numerous well respected reports including The Apartment Report TM .

Crittenden was interested in reporting on the growing number of small firms like ours who were putting together funds (syndications) and wanted to know what made them tick.

I was actually unaware the article came out until I received an email from an interested investor expressing interest in our venture this morning and it has only been one day since publication!

Below is a summary of the most recent article I was quoted in. The summary of the article talks about  many of the big investors are on the sideline or only looking for Class-A assets leaving great opportunities for the smaller entrepreneurial companies putting together syndications.

New Funds Fuel Investment on Crittenden.


Expect a growing number of investors starting to go on the offensive again this year by raising and utilizing fund resources to opportunistically shop for assets across the country.  A large cluster of bigger institutional funds are taking a temporary hiatus, leaving the arena open for smaller investment vehicles priced below the $30M mark to make their move. Look for such firms including JVM Realty Corporation, JDT Holdings LLC,Gabhart Investments Inc. (GII) and KC Venture Groupto fish around for market-specific deals using discretionary cash coffers.

As the availability of for-sale product continues growing this year, bet on more capitalized entrepreneurial funds to pop up and take advantage of good pricing. Most will cash out or look for an exchange at the end of the hold period.  Don’t be surprised to see the majority of smaller funds modus operandi jump on distressed plays that can yield tantalizing returns. On the other side, count on select larger funds from players like Bell Partners to remain active and shop for Class-A/B complexes, while Boston Capitalcloses on a mega tax-credit fund and is already hard at work on a succeeding fund of nearly $300M.

The article goes on to state that it is no surprise these funds are favoring apartments as a safe risk adjusted return. Because of this buyers are trying to raise money to take advantage of these opportunities. Especially with the Fannie Mae, Freddie Mac and FHA providing such attractive apartment financing at such low rates.

The discounts these funds are seeing are on average 15% to 25% and are focused on older Class-B and C products in historically good markets. Most of these deals are penciling out with IRR’s of at least 20% (we are shooting for 25% over a 5 year period).

The report also mentions that on the other side larger capitalized buyers typically chase after quality Class-A product. This is what I am seeing also.

We were the smallest fund on this list (for now).

Gabhart Investments looks to raise an aggregate $2M investment vehicle to acquire between 60 and 200 units in recession-beaten locales such as Arizona, Las Vegas and California’s Inland Empire. Expect the equity to be raised within six months and be fully committed over a 12-month period. The fund continues to look for JV partnerships and qualified investors putting in $50,000 – $500,000. President Curtis Gabhart hopes to pay cash for the deals and eventually refinance them and recycle the capital. He looks for an IRR in excess of 20% and a three- to five-year hold. Count on Class-B to -C distressed.

The ranges of these Real Estate funds were anywhere from 2-25 million in equity and were in many different markets throughout the U.S. including, Florida, Texas, Phoenix, Las Vegas and others.

Our apartment acquisitions will be primarily within a 3 hour drive or flight from San Diego which will include Phoenix, Las Vegas, and The Inland Empire. In addition we feel that San Diego will have some select opportunities towards the end of this year and through 2011 & 2012. In addition to apartments we will also seek other complimentary opportunities like 1-4 unit flips while we are in that market which will give us better efficiencies and economies of scale and build stronger and better relationships with the locals.

This new fund will expand on the recent success we have had buying and flipping REO single family homes. Currently we have more investors than inventory and this will allow us to expand the opportunities for us and our investor partners.

I will post our business plan soon that we are using for the 1-4 unit single family homes and for the new apartment venture. To learn more about what goes into developing a private placement memorandum (PPM) you can read a previous post by clicking here.

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In the office today working on my 2010 Real Estate business plan & PPM

Business Planning for Real Estate

I am still working this Saturday evening (after being here all day) putting pen to paper (more like fingers to keyboard) coming up with my 2010 strategy of buying real estate. I plan on 010 being a good year with no plans to hit a grand slam but just trying to stay in the game with singles and doubles.

I believe that the people who can stay in the game, whether Real Estate or any other business will be able to take advantage of the opportunities that are going to come up in the future, its times like these that make great people, Not when its easy. I just wish sometimes the thoughts from my brain translated easier to paper and then back up again to the reader’s brain. I am hoping by writing in my blog it will help loosen the wheels since I seem to have had writer’s block.

First I need to ask myself where are the opportunities going to be that I can take advantage of?

  • I think the opportunities for the average investor will be in the residential market at least for the next 12-18 months.
  • I believe this segment seems to have the best risk vs. reward ratio with the lowest/easiest barrier to entry. I would love to sit here and say Commercial will be the play but for most people this will not be the case. I do expect that to change in the over the next 12-18 months as sellers (including banks) who need to sell sale which will set the prices the market is willing to pay. This has already happened in the residential side on the low and mid price points, upper end is still in for a hurting. The problem is right now the average buyer of the commercial is worried that if they buy today it will be worth less tomorrow and the sellers are holding on to hope that values will go up. On top of that the people who are out there looking to buy are having challenges getting attractive financing which is making it so less people can buy, Which allows the people who can are able to be choosier.

At some point there will be a clearing of prices until we hit and test the bottom. My business goal is to be prepared to take advantage of that opportunity when it arrives through buying, selling & holding onto these residential projects. These (commercial) deals out into the future will be bigger opportunities or the so called triples, home runs and grand slams of the business. At this time though the risk to me is not worth it and it is critical at this stage in the market not to take any unnecessarily large risks and that is why I am enjoying buying a flipping the residential homes. If any one of the homes loses money it will not be an amount that can’t be recovered from or the money tied up won’t change my life if we can’t sell. This is not the case on larger deals (for me).

So that leads me to where I am right now and right now I am ready to pull my hair out!( j/k sorta). Actually right now I am doing more than a business plan I am actually putting together the outline of the PPM or otherwise known as a private placement memorandum so the attorney can take that and do there legal mumble jumbo. Part of my plan this next year is to combine my money with investors so I can scale up what I have been doing. Up until this point I did not want any more money even though I get asked quite a bit to invest with me. I wanted to establish that it could be done with my money and it seems to be the case.

Back to the PPM (private placement memorandum)

Here is an outline of some things a PPM should have that may help your attorney understand what you are trying to accomplish (remember don’t be a cheap ass and try to create your own. You should not create your own, but you may want to answer some of these questions so you can give to your attorney to help you create a good one)

1) Coversheet A brief statement of

a) Contact information

2) Summary of the Offering

a) This section contains brief bullet points with the highlights of the offering.

b) Should discuss the terms,

c) The structure of the company

d) The purpose of the investment,

e) Management

f) Distributions and compensation of management.

3) Terms of the Offering

a) The price,

b) The length of time the offering will be open,

c) Escrow conditions,

d) Over-subscription,

e) Maximum and minimum offerings.

4) Description of the Business

a) Describe the project or the business. In a real estate context

b) Describe location,

c) Improvements,

d) Neighborhood,

e) Occupancy,

f) Purchase agreement terms,

g) Financing, reserves,

h) Construction issues,

i) Environmental factors,

j) Management and

k) Anything else which would be material.

l) Identify matters which are the belief of management as opposed to observed facts. It is helpful to reference any appraisals, title work, studies and other due diligence matters, but it is not necessary to attach these to the PPM.

5)  Management

a) Describe the management of the company and the experience of the principals.

b) Disclose any negatives, such as prior syndications which have ended in bankruptcy or foreclosure.

c) Describe all prior experience with syndications.

d) Discuss all experience in the type of project being syndicated, as well as other real estate experience.

6) Compensation of Manager and Affiliates all compensation to managers and affiliates must be disclosed in detail.

7) Financial Summary

a) The PPM should contain financial forecasts or projections. These can be done by an accounting firm or by management. (some attorneys will tell you not to make forecasts)

b) If forecasts are included, significant assumptions must be explained, after in the form of footnotes.

c)  Show perspective of the company and the investor. Most people like to see an internal rate of return for the investor (if you don’t know how to calculate this email me)

8) Conflicts of Interest

a) Describe any conflicts of interest which the issuer and its principals might have. This is a good place to describe conflicts

i) The issuer’s law firm might have.

ii) Are you going to compete in the fund by buying other properties?

9) Investor Suitability Standards Explain if it is it open to accredited investors only or (if under 506) can non-accredited sophisticated investors participate (this may dictate how much money you can raise).

10) Sources and Uses of Funds describe all the money coming into the project from the offering and how this money will be spent. Do this with both the minimum and maximum raise.

11) Summary of Operating (or Partnership) Agreement Provisions

a) Summarize paragraphs concerning distributions of cash and allocations of tax items. Also consider summarizing paragraphs relating to withdrawal of members and restrictions on transfer.

b) Discuss management issues; including any rights (or lack of rights) the investors have to participate in significant management decisions.

12) Risk Factors probably the most important part of the PPM because it will be relied upon by the issuer to protect itself from claims of misrepresentation and omissions of material information by the investors. The idea is to be as comprehensive as possible. The risks are two types:

a) General and

b) Specific.

c) There is a broad statement at the beginning that it is a speculative investment. Some risks common in real estate syndications are:

d) Lack of liquidity in the investment (always true)

e) Risk from competition, both in the general market place and in the location of the property (almost always true)

f) Financing risk, (always true, even if the property has permanent loan, it will expire some day and rates might be higher or money harder to get)

g) Environmental risk, (always true, even if there is an environmental study, the engineer might have missed something or there could be a future spill

h) Lack of appraisal (unless there is a fresh MAI appraisal for the syndication)

i) Development risks (permits, wetlands, cost overruns, etc)

j) Dependence on manager’s activities (always true, what happens if something happens to the key people)

k) Conflict of interest

l) Foreclosure

m) Unreliability of financial forecasts

n) Arbitration, if applicable.

Try to think of every possible doomsday scenario.

13) Tax Aspects should have some discussion although each investor must be counseled to seek his own tax advice. Explain basics of pass-through entity, passive activity rules, at risk limitations, tax allocations, depreciation assumptions, tax audits and other matters. Unless it is tax shelter syndication, no tax opinion is expected. The discussion would be much more detailed if it is a tax shelter deal.

14) Subscription Agreement is important.

a) It contains the investment representation of the investor needed for compliance with Rule 506.

b) Also should include representation as to accredited status and residency.

c) Provide signature page for operating (partnership) agreement. Investor should acknowledge receipt and review of PPM; disclaim oral representations and other normal contractual matters.

Ok time to get home. If you find this helpful please tell a friend and let me know also. If you have any questions you would like me to answer go to the interact page to ask it and I will try to answer ASAP.


Curtis Gabhart


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Over the weekend we went to the UFC in LA and sat behind Janet Jackson, Ashton Kutcher and some other stars. We got some great pictures and it is nice to be able to do things like this.

For the most updated information & news on real estate & Gabhart Investments go to our facebook & twitter pages

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