ACQUISITION CRITERIA

Investment Strategies & Acquisition Criteria

Crown Bay Group utilizes two core investment strategies.

1. Acquiring already reasonably stabilized properties
2. Acquiring distressed properties that are in need of rehabilitation.

The so called “value play”is something that is available in using either strategy. In fact, value-add strategies are one of the main things we look at when evaluating a potential deal. There are many ways to add value to a property, some obvious, and some that take experience and much thought to find and implement. While above average cash flow from day 1 of a purchase is great, value-add strategies can lead to an accelerated increase in the overall worth of the property, allowing for an early refinance or sale if wanted.

Crown Bay Group – Investment Strategy 1

Acquisition Criteria

This strategy revolves around acquiring reasonably stabilized properties that have an acceptable occupancy but room to improve. The property will have had major capex items done within the last five years, i.e. new roofs, windows, HVACs, hot water heaters, possibly renovated amenities, etc. These are properties that can be conventionally funded through the major banks and/or Fannie Mae or Freddie Mac. The projects will usually be bought below retail value allowing for an instant equity capture. Also, it must have an above average cap rate and be cash flowing. There must be a value-add element through either new and more effective management, completing minor works i.e. upgrade interiors, add curb appeal, and forced appreciation through weeding out the non-paying and habitually late paying tenants to improve collections, and improve tenant quality and retention. Of course, the goal of all of these is to be able to raise rents to increase NOI. And lastly, forensically review all property expenses and adjust (cut) accordingly.

General:
• Multifamily – Class “C” or better
• Located in growth markets where employment and population are trending positively
• Have some aspect that permits a “value-add” opportunity
• Above market vacancy
• Above average expenses
• Below market rent
• Little deferred maintenance
• Any repairs which could be completed within the short term for minor captital
• Additional land that could be sold independently
• Has stable and sustainable cash flow in place at the time of purchase, or could achieve within a 3–6 month period of time
• Possibly a component of seller/owner financing

Property Type:
• Primary emphasis on multifamily properties of 100 units and up.

Markets:
• Primarily southeast US – with emphasis on Georgia, North & South Carolina, Alabama, NE Florida, Oklahoma. Other States and cities will be considered on a case-by-case basis.

Age of Property(s):
• 1970 or newer preferred.

Transaction Size:
• $2,000,000 to $20,000,000

Occupancy:
• Minimum 85% occupancy to allow for convention funding.

Cap Rates:
• 8% + to be considered

Hold Period:
• 3-7 years for most properties. We will occasionally sell off a property at 12 months + if we have achieved an above average increase in value with minor effort.

Leverage:
• Must be able to be financed by conventional methods.

Crown Bay Group – Investment Strategy 2

Crown Bay Group is actively involved in the acquisition, asset management, renovation, repositioning and disposition of “value-add” apartment assets. Value-add apartment assets are usually characterized by under-performing income producing properties due to a variety of causes. Our primary investment strategy is to purchase a subject property at a discount and then expeditiously resolve problem issues with the purpose of increasing net cash flow and in turn increasing the market value to the subject property.

Crown Bay Group focuses on properties that have been mismanaged or have deferred maintenance, that are in receivership, have been foreclosed on, have lower than market occupancy, or need to be recapitalized. Such properties offer the ability to increase cash flow and equity through renovation and professional management. In order to bring rental rates to market rates and stabilize the occupancy, properties are renovated within the first 6 months of the acquisition, problem tenants are evicted, the qualification standards are raised for all residents and an aggressive leasing program is implemented. Following project stabilization, a suitable exit strategy can then be implemented. Refinance to pull out funds and hold for future appreciation, sell for new value created from repositioning/renovation, decision dependent on the phase of market cycle the location of the property is in. Crown Bay Group is structured to be highly opportunistic as it competes for distressed or under performing opportunities in the multifamily market place. We have an extensive network of broker relationships, and a variety of lenders to choose from depending on the needs of a particular project.

Crown Bay Group – Strategic Property Focus

Our strategy involves focusing on the following property characteristics:

• Property Type – B & C properties.

• Property Characteristics – under-performing occupancy (below 90%); moderate deferred maintenance (less than 40% of acquisition cost); and refinance opportunity.

• Target Size – communities of 100+ units; average community size is between 150–240 units.

• Markets – top 20 MSAs as well as secondary and certain tertiary markets.

• Expected Holding Period – 3 to 7 years.

Crown Bay Group – Rationale for Investment in Value-Add Properties

• In these difficult economic times, highly leveraged multifamily properties have mortgage notes that are coming due and owners are not able to refinance these properties. Without available financing, owners are being forced to sell. Refinancing is particularly difficult when the properties are under-performing.

• A typical method assessing the value of a multifamily property is with an “Income Approach”. Assets are valued by a multiple of their net operating income (NOI). When a property’s NOI is under-performing, this has a direct impact on reducing the value of the property. If NOI was to be improved through proper stabilization, an immediate increase in equity could be gained.

• Many under-performing properties are a result of poor management of the property without clear policies and procedures allowing for unqualified tenants, lenient enforcement of rules, and lost rental income. An attentive management team with a goal oriented leasing and marketing strategy can improve the occupancy and increase the long term stability of a property.

• Under-performing properties can be the product of neglected maintenance resulting in below market rates. Following property renovation, rents may be raised to market rates, which results in an increase to the NOI.

• In the current market, the buyer pool is limited due to lack of available credit, which is causing sellers to further discount values.

• Investing in multifamily properties can be a hedge against inflation. Rental rates adjust upward with inflation in most cases. Borrowing at fixed rates can work as a hedge against inflation.

• Tax benefits may be available for the income earned from owning apartments and deductions for depreciation and expenses may be beneficial in shielding income from FICA taxes and deferment of capital gains taxes. Prospective investors are urged to consult their own tax advisers with respect to their own personal tax situations and the effects of this investment thereon.

• Due to the tight availability of credit, a large number of distressed properties and a lack of qualified buyers, it is the opinion of Crown Bay Group that a window of opportunity exists and that now is the time to buy value-add multifamily properties.