Acquisition Update

Before we dive into the Eat Street Portfolio’s unique value-add opportunity we have some exciting news to share. Blvd Ventures has recently entered into a contract for the acquisition of an outstanding apartment community located in the suburban Twin Cities, MN area. This opportunity allows us to assume a loan with a fixed interest rate of just 3.33%. We expect to close on the property in late 2023 or early 2024. We look forward to sharing more details soon and will keep you updated as we progress through the due diligence phase.

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Turning Parking Into Profit

In May 2022, we successfully acquired the Eat Street Portfolio, which comprises 67 units situated along Nicollet Ave, famously known as the culinary capital of Minneapolis. These 67 units are housed within three buildings, which were completely remodeled resulting in a unique product that displays the vintage charm of turn-of-the-century architecture while presenting finishes that can rival those of class-A competitors.

The key opportunity within this acquisition lies in the improved management of the buildings, the implementation of a utility bill-back program, and the potential for increased additional income. One significant source of additional income is parking.

In this particular region of Minneapolis, parking is a scarce commodity. In fact, many new developments no longer include parking in their plans, as it is not mandated by the city. The Eat Street Portfolio features 18 parking spots. We took immediate action by restriping the lot and numbering each parking spot. Upon completion, we extended the offer to our tenants, allowing them to rent these spots for $100 each. As a result, we now generate $1,800 in monthly parking revenue. Let's take a look at the value this creates.

The monthly parking fees of $1,800 translate into an impressive $21,600 in annual revenue. What makes this particularly appealing is that 95% of this amount contributes directly to our bottom line, as there are minimal ongoing costs associated with providing these parking spaces. The resulting boost to our Net Operating Income (NOI) stands at $20,520.

As you may be aware, the value of an apartment building is closely tied to the cap rate at which it's traded. The formula is straightforward.

NOI / Cap Rate = Value

In this case, since all of the additional income directly contributes to the NOI, we can calculate the increased value as follows:

$20,520 / 6.5 = $315,692

This translates to an impressive increase in value, exceeding $300,000, all thanks to the simple act of billing for these much-needed parking spaces.

The acquisition of the Eat Street Portfolio provided us with an exciting opportunity to optimize building management, introduce a utility bill-back program, and explore new income sources. This strategic approach highlights the remarkable potential of diversifying income streams, ultimately adding over $300,000 in value to the property.

Current Status

As of today, this deal has reached a 97% occupancy rate. Although we encountered challenges with our third-party management company upon the initial acquisition, transitioning to in-house management under BLVD Management has proven to be a game-changer. Our team has delivered substantial increases in income, and we're rapidly closing in on our proforma projections. This success stands as a testament to the exceptional capabilities of the top-notch group we've assembled, particularly in optimizing asset performance.

Insights & Perspectives

The burning question on many investors' minds is whether interest rates will undergo a significant reduction within the next 12-24 months. Accurately predicting the future has never been our specialty, but we're certainly keen on seizing the opportunity should a rate cut materialize. When assessing interest rates in our underwriting for new deals, we have set two primary objectives.

Lock in the interest rate for an extended duration, maximizing the fixed period. To some, this approach might seem counterintuitive if there's an expectation of falling rates. It's crucial to remember that predicting interest rate movements is highly uncertain. For all we know rates could go to the moon. If the deal remains feasible at the prevailing interest rate, we consider fixing it for an extended term, with one important condition in mind.

Strive for the shortest prepayment period achievable. Prepayment penalties typically fall into two categories: Yield Maintenance (which we avoid) and step-down. Step-down prepayment penalties provide clear insight into exit costs, as they represent a percentage of the loan balance due upon exit. For instance, it might specify a 5% exit fee in the first year, decreasing to 4% in the second year, and so on. In all our new debt quotes, we are requesting the shortest step-down duration possible to be well-positioned for capitalizing on potential lower rates. We might even consider "buying down" the prepayment penalty by accepting a slightly higher interest rate. As an example, we could opt for a rate increase from 6.5% to 6.8% if it means we can exit with only a 1% penalty in the second year. We wrote an entire blog post comparing Yield Maintenance to Step-down payments you can check it out here.

Our primary objective is to steer clear of speculative bets on singular positions and, instead, adopt low-risk debt strategies that increase our potential for financial growth. This approach allows us to navigate the ever-changing landscape of interest rates and prepayment penalties with calculated precision, ensuring we remain adaptable and well-prepared for unforeseen market developments. By emphasizing short prepayment periods and minimizing step-downs, we're positioning ourselves to seize opportunities presented by favorable rate fluctuations while mitigating potential risks.

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