REAL ESTATE INVESTMENT FUND I LLC - Equilibrium Real Estate Investments
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EQ REAL ESTATE INVESTMENT FUND I LLC

The Purchase Opportunity and Strategy:

In 2009 there were a seemingly endless number of investment opportunities available in Washington, D.C. with very little financing available that could be applied towards those potential purchases. For the most part, financing was only available for stabilized properties, and as market conditions worsened, a greater number of distressed and otherwise troubled properties were entering the market without the ability to be purchased, except through all cash purchases. Hard money lenders were not even lending.

Banks responded quickly to the numerous loans that went unpaid and their collective foreclosure efforts ultimately resulted in a large number of Bank REO’s (Real Estate Owned By Banks). Bidding participants at the foreclosure auctions often were unwilling to pay the loan balance amounts owed in order to “win” ownership of properties in foreclosure and so the culmination of the foreclosure process resulted in banks taking possession and ownership. This resulted in banks owning an unprecedented number of foreclosed properties (in Washington, D.C. and throughout the U.S.). Prior to the banks individually and collectively adjusting the rate at which their foreclosed upon REO properties would be released to the market, there was a scramble to remove these REO properties from their balance sheets, resulting in both a glut of foreclosure offerings in the market and a willingness by the banks to sell at significant discounts. These factors helped propel the housing price downward spiral, ultimately creating a buying opportunity.

Equilibrium recognized this purchase opportunity and instead of moving forward with one or two purchases at a time (as had been our previous mode of operation), Equilibrium mobilized its efforts and raised a fund specifically to address the opportunity. The Fund ultimately purchased, developed, transformed and sold a total of 16 properties, utilizing minimal financing. In addition to generating exceptional financial returns, we were able to stabilize several blighted properties that were problems for their respective communities and we were at the forefront of the revitalization of several Washington, DC neighborhoods.

Our purchase criteria and strategy was very conservative. A property, post renovation, would not be sold unless EQ was able to sell for 30% or greater return on initial cash investment. Furthermore, each purchase required stabilized underwriting that demonstrated the property’s ability to be cash flow positive and obtain cash-out financing that fully returned purchase and renovation cash invested in the event that the property was not able to be sold immediately post renovation.

With this strategy in place and a focus on Single Family Row Home Conversions into Two Unit Properties (simultaneously creating value while providing increased potential rents and the ability to generate viable cash flow in the event property is not immediately sold) and the rehabilitation of dilapidated 4 unit properties, we were able to resurrect a total of 16 properties, eight (8) of which were four (4) or more unit transformations, six (6) of which were single family or two-unit conversions to two or three-unit properties and 2 of which were actually properties with a commercial component (Mixed Use Development) that also underwent unit count and/or usage transformations.

FINANCIAL OVERVIEW

ROI AVERAGE:

54%

EQUITY MULTIPLE:

2.5X

The Challenge:

Nine (9) of the 16 properties purchased were post foreclosure bank owned REO’s that suffered from months (and sometimes years) of extreme neglect as the property passed through that process, with the remaining 7 properties also suffering from similar neglect given that they were purchased as distressed sales. As such, all properties were virtually dilapidated with most being completely uninhabitable, requiring significant development, construction and renovation.

The development effort in many cases was not dissimilar from ground up construction, as only the exterior walls remained at purchase or post demolition, requiring all new construction including joists for each floor and the delivery of all utilities from the street.

In addition to the physical challenges on-site, there were often technical challenges associated with obtaining permits in a reasonable time-frame and avoiding vacant or blighted tax designations (which result in a 5% or 10% of assessed value being taxed) while working to obtain the necessary permits required in order to remedy the vacant or blighted condition of the property in question.

Implementation and RESULTS:

With a dedicated construction team in place, oftentimes working on multiple properties at the same time, Equilibrium established and refined a process that reduced time to market/completion despite the standard permitting obstacles in place. Due to the condition of properties at purchase (shells requiring complete demolition), there was very little to inspect on properties outside of standard structural requirements, allowing us to initiate the architectural planning process prior to close and to move forward with a demolition permit immediately after closing. This implementation approach allowed for construction to begin sooner than would otherwise be possible.

The purchase and sale criteria identified above was strictly adhered to, leading to some immediate sales, some post renovation rentals and some additional 1031 exchange purchases from completed projects, the proceeds from which were reinvested into new renovation/rehab opportunities. A total of 16 properties were purchased and renovated with nine (9) properties sold immediately post renovation, seven (7) properties rented prior to being eventually sold at a greater than 30% return on investment and a total of three (3) properties sold into a 1031 exchange resulting in five (5) tax deferred purchases. Return on Investment for the properties ranged from 31% to 136% (average of 54% and median of 40%) and the Equity Multiple for the entire portfolio was approximately 2.5x.