Crown Bay Group

REVEALED: THE DIFFERENCE BETWEEN FORCED APPRECIATION AND MARKET APPRECIATION

REVEALED: THE DIFFERENCE BETWEEN FORCED APPRECIATION AND MARKET APPRECIATION

When making any investment, those investing expect the value of the investment to increase over time. What’s unique about apartment investing (compared to say, single-family rentals or homes) is that investors can deploy strategies to force an increase in property value by increasing Net Operating Income (NOI). This is called “forced appreciation” and is very different than “market appreciation.” Here’s an example to illustrate the difference: In 2020, a group of investors purchased a 100-unit apartment building for $8.3 million. At the time of purchase, the property’s NOI (revenue minus expenses) was $500,000. The NOI divided by the purchase price reflected a 6% cap rate.   Market Appreciation Scenario After two years, the property is unchanged. Rents and expenses are the same, so NOI is also the same. However, investor sentiment shifted upward. As more and more investors chase apartment deals, pricing is rising (and cap rates are falling). Today, a broker believes the property would sell for a 5% cap rate (compared to 6% at purchase), which means the property is valued at $10 million (with $500,000 NOI). Market appreciation increased the value of the property by $1.7 million (and the investors did nothing). Market sentiment, not property fundamentals, drove the price higher (and cap rates lower).   Forced Appreciation Scenario Instead of maintaining status quo for two years, the ownership group invested $200,000 to improve curb appeal and security and replace the underperforming management team. As a result, rental rates increased by $150/unit/month – and, therefore, so did the NOI. Here’s the math: 100 units X $150/month X 12 months = $180,000 increase in NOI. The new NOI is now $680,000. Assuming a 6% cap rate (market sentiment unchanged since purchase), the value of the property is now $11.3 million (with $680,000 NOI).   Forced appreciation increased the value by $3 million (less $200,000 in investment) for a net increase of $2.8 million. By increasing the NOI, the investors proactively (or forcibly) increased the property value.   Market + Forced Appreciation Scenario (the best of both worlds) Now, consider if market sentiment increased (and cap rates dropped to 5%). The value of the property climbs to $13.6 million. A combination of forced appreciation and market appreciation increased the value by $5.3 million. Call that a “win-win”! As investors, it’s important to be conservative and always assume that market sentiment will not increase (i.e. cap rates will be higher in the future). Using strategies to increase NOI and forcibly increase property value, increases the chance of a successful investment via forced appreciation, while also protecting downside risk if market appreciation does not occur.

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DO WELL BY DOING GOOD: THE ART OF TRANSFORMING B + C CLASS COMMUNITIES

Why invest in aging workforce housing when common practice today leans towards razing them to make room for Class A developments? Is managing the challenges of these types of properties worth the risk? The truth is, it may not be right for everyone.With the right partner, however, the returns can be unbelievably rewarding.   What’s the secret recipe for transforming Class B and C properties to benefit the community, its residents – and your bottom line? Entering into each property with a genuine interest and desire to do what is right and what matters- for the residents that call this property home. The age-old philosophy, “by doing good you will do well,” still holds true today.   Yet, navigating some of the more pervasive challenges common with these types of properties is no small feat.Our team at Crown Bay Grouphas exclusively focused on investing in, improving and managing workforce housing properties throughout the Southeast for the benefit of the community – and investors – for more than 15 years. Our goals and our gains are two-fold: residents experience heartfelt gratitude for a higher standard of living, while investors continue to reap healthy returns on their investments.   Market Demand   First, let’s talk about the overwhelming demand for this type of asset. Essentially all new development over the last decade has been Class A luxury – yet the Class A market makes up only 20 percent of the total rental market. New construction of affordable, marketrate units is just not financially feasibletoday. Consequently, no meaningful workforce supply has been added this past decade. In fact, despite the pervasive need for workforce housing, the supply has decreased with older units being demolished to make room for Class A construction.   Government subsidies help fund the development of some types of low-income housing with the assistance of Low Income Housing Tax Credits (LIHTC). Oftentimes, however, essential workers earn too much to qualify to rent those properties – while still not being able to afford Class A property rentals. Market rate workforce housing is critical to ensuring access to housing for some of our most essential workers in construction, healthcare, transportation, government, education, nursingand public safety.   Unlike government-subsidized developments, market rate workforce housing receives no construction subsidies and is not subject to the same qualifying factors for renters. Market rate workforce housing generally includes Class B and C properties that are comprised of mostly older communities with limited amenities and basic interior finishes. These types of properties tendto be located in suburban areas, with low-rise or garden style construction and rentsthat are affordable for lower-middle and middle-income families.   Navigating Challenges: It’s Not Just About Upgrading Units   The critical need for workforce housing deserves to be met by safe, well-managed, well-maintained options. Delinquencies, crime, disrepair and poor management are common hurdles to overcome in creating desirable workforce housing communities.   A well-developed business plan – with an appropriate allocation of funding for property improvements – is imperative to successfully navigating the most commonchallenges of Class B and C properties. An in-house property management team further ensuresthe goals for improving the standard of living for the community are stringently pursued. This dedicated resource ensures the success of the community – and ultimately the investment.   Critical areas for improvement this team enforces often include:   • Customer service: A leak, a broken stove or refrigerator, or having your heat stop working in the middle of winter can be a real disaster. Slowrepairservice is often the number one complaint by tenants. By adopting a strict 24-hour response policy, our in-house management team is motivated to ensure repairs are quickly addressed and tenant needs are well managed.   • Value: Sometimes it’s the little things that matter most. Updated playgrounds, dedicated BBQ areas, repaired pot holes, and returningswimming pools to service are just a few of the first steps we take to increase community satisfaction – and value – to properties. The net result? A higher standardof living begets a higher standard of behavior. Modest updates contribute to significant improvements in living environment. Tenants feel valued and work harder to pay rent on time, turnover is reduced – and we see an uptick in renter referrals.   • Safety first: From car break-ins to gang activity, safety infractions erode goodwill and a sense of security in the community. Improving lighting and ensuring entry gates function properly are helpful remedies, as is taking a zero tolerance approach to problematic tenants. Establishing partnerships with local authorities and hiring off-duty officers to patrol propertiessignificantly curbs or eradicates criminal activity.   Some wonder – how did eviction moratoriums impact the bottom line on such properties during the pandemic? Whereas many Class B and C properties experienced a great deal of delinquency in rent payments, well-maintained properties with management that was committed to its residents experiencedlittle variation with monthly collections consistent with pre-COVID conditions.   In fact, some of our property management teams went the extra mile to assisttenantsin findingnonprofits to provide rent subsidies, completing forms to receive stimulus funds, and identifying ways to stay current on their rent.   Financial Benefit   Investments in these types of properties can earn significantly above average ROI – not only through passive, quarterly distributions, but also through end-of-cycle returns upon the sale of the property.By improving the property and elevating the caliber of renters, and with proper care and efficient management, above averagereturns are possible.   There is an art to making workforce housing a lucrative investment. The secret recipe?A sincere commitment to doing good by these communities, coupled with a well-funded development plan. Together, these can generate tremendous rewards to both the living environment and overall wellbeing of the residents – as well asinvestors’ portfolios.   Steve Firestone is Founder and Principal of Crown Bay Group, a real estate investment company passionate about multifamily workforce housing. Firestone is dedicated to creating a superior environment for residents and above-average returns for investing partners.

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WHY IN-HOUSE PROPERTY MANAGEMENT IS RIGHT FOR US

Interior of an apartment made of paper. Living room, warm colors, handmade.

Managing large multifamily properties is difficult. An onsite team can make or break a community – and, in our case, an investment.   When Crown Bay first started, our management strategy (and really only option!) tapped a third-party property management company to run day-to-day operations. However, as business grew and experience abound, we learned.   We learned the importance of in-house property management, a revelation that played a critical role in our investing success.   We went to work.   We created a separate subsidiary. We hired an Director of Operations with 30+ years of property management experience to run it. Crown Bay Management only manages and operates our properties.   Why is this the right move for us?   1. Alignment of Interests Our property management team is incentivized to operate our properties as efficiently and financially aggressive as possible. If the property performs well, the team is rewarded.   For typical third-party management companies, their fees increase only with the addition of more management assignments regardless of how properties are performing.   2. More control Crown Bay Management is laser focused on only properties owned by Crown Bay Group. A third-party management company reports to several owners, oftentimes giving most attention to the largest landlord.   For us, having more control and oversight of management and operations has created a stronger alignment of interests that has also led to superior property performance. Not only does this benefit residents – but also our investors as net operating income inevitably climbs and property values increase.   And we sleep better with this peace of mind.

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MORE ATLANTA WORKFORCE HOUSING SELLS FOR TOP PRICES

Crown Bay Group sells two-property portfolio in metro Atlanta.   ATLANTA — Crown Bay Group, LLC (Crown Bay), an Atlanta-based multifamily real estate investment firm, announces the sale of a portfolio of two multifamily apartment communities — Southlake Cove in Jonesboro, Ga. and Vineyard Pointe in Riverdale, Ga. — to R. James Properties, Inc. for a combined total of $35.86 million. The sale closed on March 9 and is the latest of several transactions for the investment firm, underscoring the continued viability of the workforce housing product in today’s commercial real estate market.   “When we purchased these properties in 2019, we were able to see the upside and potential value-add within these communities,” explains Steve Firestone, founder and principal, Crown Bay Group. “Over the past two-plus years, we were strategic in the improvements made, both from a cosmetic and management standpoint. The fact that we were able to sell them for significant profit that well-exceeds our proforma in less than three years, demonstrates the value of forced appreciation, not to mention the historical stability of this asset.”   Crown Bay sold Southlake Cove, located at 7509 Jonesboro Rd. in Jonesboro, for $27.3 million. The firm acquired the property in February 2019 for $18.3 million. Built in 1987, the 34.5-acre complex includes 45 buildings with 346 primarily one-bedroom units. Community amenities include a fitness center, pool, playground and onsite laundry facilities. The property is located minutes from Hartsfield-Jackson Atlanta International Airport with accessibility to Interstates 75 and 675.   Following over $3 million in capital improvements made by the previous owners, Crown Bay continued making enhancements to the property upgrading units with resurfaced countertops, brushed nickel fixtures and hardware, new flooring and appliances and modern lighting. In addition to physical improvements, the firm’s in-house property management team deployed its programmatic management strategy to stabilize occupancy and increase rental rates to better align with the existing market. The property sold 100 percent occupied, up from 91 percent when purchased by Crown Bay.   Crown Bay also acquired Vineyard Pointe in the same February 2019 transaction for $5.7 million. This property, located at 8213 GA-85 in Riverdale, recently traded hands for $8.5 million. Built in 1989 on nearly 11 acres, the complex includes 18 buildings housing 108 one- and two-bedroom units. The property benefits from exceptional visibility from Georgia Highway 85 and accessibility to employers such as Majestic Airport Center and Morrow Industrial Park. Crown Bay invested additional capital to make similar cosmetic upgrades to the units and deployed its management standards to improve the overall standard of living and bring rents to market rates.   “Properties such as Southlake Cove and Vineyard Pointe are popular among the workforce employee base – and now investors too,” adds Firestone. “Minimal tenant turnover and delinquency typically make for a stable, steady cashflow. For this reason, this historically stable, recession-proof product will continue to be an attractive avenue for investors to diversify their portfolios, particularly during uncertain economic times.   “It’s really about increasing net operating income and the resulting forced appreciation that makes for a significant return on investment,” continues Firestone. Deploying tactics such as rent rate increases and washer and drying rental programs, Crown Bay significantly increased the net operating income of the two-property portfolio.   This two-property disposition is the latest in a slew of transactions finalized by Crown Bay in recent months. Since June 2021, the company has transacted nearly $115 million in Atlanta. Other recent sales include Pines of Southlake for $10.5 million and Cascade Oaks for $12.4 million. The company continues to acquire workforce housing properties with potential upside including Netherley Park for $31.6 million and the combined portfolio of Bullock Habersham Apartments and Dodson Courtyard Apartments for $20.45 million.   About Crown Bay Group, LLC Founded in 2013, Crown Bay Group is a privately-held real estate investment and asset management firm based in Atlanta. The firm specializes in the acquisition, operation, management and disposition of multifamily properties throughout the Southeast. Since its inception, Crown Bay has owned and operated a multifamily portfolio of 3,665 units valued at more than $270 million.

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CROWN BAY GROUP SELLS APARTMENT COMPLEX FOR $37 MILLION

Significant returns show forced appreciation at work, historical stability of asset type.   ATLANTA — Crown Bay Group, LLC (Crown Bay), an Atlanta-based multifamily real estate investment firm, announces another successful real estate sale in a string of recent transactions that demonstrates the strength of the market-rate, workforce housing product in Atlanta. The firm sold FortyThree75, a 260-unit apartment community in Southwest Atlanta, to Beach Real Estate Funds, LLC, an affiliate of Charleston, SC-based The Beach Company, for $37.05 million. The transaction closed January 14. No additional transaction terms or details are available.   “We acquired this property at a very uncertain time during the pandemic when many buyers were sidelined,” says Steve Firestone, founder and principal, Crown Bay Group. “Though our approach was cautious, we eagerly took advantage of the unusual market conditions.”   Crown Bay acquired FortyThree75 in October 2020 for $20 million. In addition to cosmetic improvements, the firm’s in-house property management team deployed its programmatic management strategy to stabilize occupancy and increase rental rates to align with the market. Built in 1974 at 4375 Cascade Rd. in Atlanta, the property was 97 percent leased at the time of sale. Amenities include a swimming pool with sun deck, playground, gym, picnic grilling area and an onsite MARTA bus stop. Its location on Cascade Road is just two miles east of Fulton Industrial Corridor, the largest industrial corridor in the eastern United States that employs 20,000+ workers with a payroll $1 billion.   The sale of FortyThree75 is the latest in a number of transactions Crown Bay has finalized in the past six months. Since June 2021, the company has transacted nearly $115 million in Atlanta. Most recently, the company sold Pines of Southlake for $10.5 million and Cascade Oaks for $12.4 million. The properties were acquired in 2020 for $6.4 million and $8.3 million respectively. The firm has also acquired several properties in recent months, such as Netherley Park for $31.16 million, and Bullock Habersham Apartments and Dodson Courtyard Apartments for $20.45 million.   About Crown Bay Group, LLC Founded in 2013, Crown Bay Group is a privately-held real estate investment and asset management firm based in Atlanta. The firm specializes in the acquisition, operation, management and disposition of multifamily properties throughout the Southeast. Since its inception, Crown Bay has owned and operated a multifamily portfolio of 3,655 units valued at more than $270 million.    

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CROWN BAY GROUP ACQUIRES TWO MORE PROPERTIES IN $20+ MILLION INVESTMENT

200+ units added to workforce housing portfolio; over $50 million invested in 2021.   ATLANTA — Crown Bay Group, LLC (Crown Bay), an Atlanta-based multifamily real estate investment firm, closed out 2021 with the acquisition of a two-property multifamily housing portfolio totaling over 200 units in East Point, Georgia. The transaction was finalized with a private Atlanta real estate investor in December for $20.45 million. No additional transaction details are available.   “We feel fortunate to have been able to take advantage of the rare opportunity to acquire two stabilized, cash-flowing properties with plenty of operational upside,” says Steve Firestone, founder and principal for Crown Bay Group. “We plan to make immediate improvements to the properties that will benefit both current and future residents and improve net operating income. What’s more, we see plenty of cross-selling opportunities between the properties, given their distinct floor plans and price point differentials.”   Currently 98 percent leased, Bullock Habersham Apartments is a townhome-style apartment complex featuring some of the largest two-, three– and four-bedroom units in the area. The 128-unit complex features a swimming pool, business center, leasing and management office, 24/7 security monitoring and a MARTA bus stop at the property’s entrance. The property, which was built in 1969, is located at 3251 Washington Road in East Point.   Dodson Courtyard Apartments, at 3520 Dodson Drive Connector in East Point, is a boutique two– and three-story apartment complex with 75 one– and two-bedroom units. Its amenities include an onsite laundry facility, courtyard and 24/7 security monitoring. An adjacent public park with tennis courts and playgrounds adds to the community’s features. Built in 1967, this property is currently 100 percent leased.   “We were able to gain access to this off-market opportunity through long-term industry relationships and acquired it at a very attractive basis,” continues Firestone. The properties are .5 miles from each other in the South Fulton submarket, a short commute to southwest Atlanta’s main economic drivers.   Crown Bay is planning $1 million of capital improvements at the properties. Improvements to unit interiors are expected at both, while for Bullock, additional improvements include upgrading the curb appeal as well as building infrastructure.   “Our goal is to increase the net operating income by increasing in-place rents and optimizing property operations,” notes Firestone. “We expect to sell the properties as a package in three to five years.”   Through acquisitions like these, Crown Bay Group offers investors the opportunity to diversify their investment portfolios to include a real estate asset that is historically stable and recession proof. Metro Atlanta’s workforce housing fundamentals have remained strong throughout the pandemic, making these properties, as well as Crown Bay’s August acquisition of Netherley Park, a solid investment.   According to Yardi, asking rents have increased approximately 12 percent year-over-year since June 2020 in the “renter by necessity” category. The Atlanta occupancy rate, across all classes, is 96.1 percent, with Class B/C properties leading the way. Upward pressure on lower-end wages and lack of new housing supply also supports rent increases, particularly since many in-place rents are below market level.   About Crown Bay Group, LLC Founded in 2013, Crown Bay Group is a privately-held real estate investment and asset management firm based in Atlanta. The firm specializes in the acquisition, operation, management and disposition of multifamily properties throughout the Southeast. Since its inception, Crown Bay has owned and operated a multifamily portfolio of 3,655 units valued at more than $270 million.    

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CROWN BAY SELLS TWO APARTMENT COMMUNITIES FOR $23M

CROWN BAY GROUP SELLS TWO WORKFORCE HOUSING COMMUNITIES FOR $23 MILLION Transactions exceed proforma following short, pandemic holds.   ATLANTA — Crown Bay Group, LLC (Crown Bay), an Atlanta-based multifamily real estate investment firm, announces the sale of two metro Atlanta workforce housing communities. In Atlanta, Soundview Equities LLC acquired Cascade Oaks for $12.4 million on November 23. In Morrow, Ga., Pines of Southlake was acquired by RW Equities for $10.5 million in a transaction that closed in October. No additional transaction details are available.   “In 2020, CBG took an opportunistic, yet discerning approach to investing given the market conditions caused by the pandemic,” notes Steve Firestone, founder and principal, Crown Bay Group. “We believed that lucrative investing opportunities still existed and navigated the uncertain market to find those assets.”   In August 2020, Crown Bay took advantage of an off-market opportunity to acquire Pines of Southlake at a risk-adjusted price of $6.4 million with the intent to hold for up to five years. Under its ownership, the firm implemented streamlined operations strategies and improved the property repairing the parking lots and pool and renovating the leasing and management office. At the time of the sale, the 93-unit community was 98 percent leased. Pines of Southlake is located at 985 Mt. Zion Rd. and features two- and three-bedroom, garden-style apartments and townhomes.   “The opportunity to earn a significant return for our investors really drove our decision to sell the assets early,” explains Firestone. “These transactions exemplify the historical stability of the workforce housing asset class – ranking it as one of the most recession-proof investment products out there.”   Crown Bay acquired Cascade Oaks in January 2020 for $8.3 million. Nearly a quarter-million dollars of capital improvements upgraded unit interiors and improved operational standards taking the community from 94 percent-leased to 99 percent, at the time of sale. The 113-unit property is located at 3820 Old Cascade Rd. SW in Atlanta and offers one- and two-bedroom apartments.   “We are fortunate to have access to many off-market opportunities and the agility to capitalize on them when the assets meet our investing criteria,” states Firestone. “Workforce housing is where we believe the greatest potential to yield safe and profitable returns for our investors, exists.”   About Crown Bay Group, LLC Founded in 2013, Crown Bay Group is a privately-held real estate investment and asset management firm based in Atlanta. The firm specializes in the acquisition, operation, management and disposition of multifamily properties throughout the Southeast. Since its inception, Crown Bay has owned and operated a multifamily portfolio of 3,655 units valued at more than $270 million.    

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CROWN BAY ACQUIRES THE PARK AT NETHERLEY

CROWN BAY GROUP ACQURIES THE PARK AT NETHERLEY IN SOUTH ATLANTA Workforce housing community adds nearly 300 units to management portfolio.   ATLANTA — Crown Bay Group, LLC (Crown Bay), an Atlanta-based multifamily real estate investment firm, announces the acquisition of its highest-priced multifamily housing asset to date. The firm acquired The Park at Netherley in Union City, Ga. for $31.1 million or nearly $106,000 per unit. The transaction closed on August 25. No additional transaction details are available.   “Netherley is the perfect addition to our portfolio of assets. It’s an exceptional asset at an attractive price, and we are pleased to be able to make this deal happen,” explains Steve Firestone, founder and principal, Crown Bay Group. “Our Netherley residents will immediately see the Crown Bay difference with a well-managed, well-amenitized, safe and clean workforce housing environment, a product that is in demand throughout metro Atlanta – and, frankly, in several markets across the Southeast.”   Built in 1988, The Park at Netherley is a 294-unit, one-, two- and three-story apartment community, positioned around a lake with adjacent green space. The community features a business center, clubhouse, playground, swimming pool and fitness center. Currently, the property is 93% leased. “We expect our proven management strategy to quickly elevate the performance of this property in a manner that will benefit both the residents as well as our investment partners,” continues Firestone.   Since 2019, more than $1 million of capital improvements have been completed at Netherley in an effort to enhance curb appeal, upgrade interiors, improve exteriors and boost common area amenities. Crown Bay plans to launch an interior renovation program to further enhance unit interiors. Crown Bay Management, the firm’s property management division, will manage the residential community.   The Park at Netherley is located on Buffington Road with exceptional accessibility to primary commercial and transportation corridors as well as employment hubs. The residential community is one mile from two Interstate-85 access points, 3.5 miles from the Interstate-85/Interstate-285 interchange and less than five miles from Hartsfield-Jackson Atlanta International Airport, the primary economic driver on Atlanta’s southside. Nearby Jonesboro Road provides access to shopping, services and entertainment for residents. Amazon, Procter & Gamble, Newell Rubbermaid, Kraft Foods and others have added significant employment capital to the region as have the million sq. ft. of warehouse and distribution centers as well as the campus of Atlanta Metro Studios within two miles from the site.   “South Fulton is a strong, vibrant and evolving market with even more growth already visible on the horizon,” concludes Firestone. “Our group has built a reputation with our investment partners for delivering solid, consistent returns. We are extremely confident that once our management strategy is deployed and takes hold, The Park at Netherley will further contribute to the value we bring to our investors.”   About Crown Bay Group, LLC Founded in 2013, Crown Bay Group is a privately-held real estate investment and asset management firm based in Atlanta. The firm specializes in the acquisition, operation, management and disposition of multifamily properties throughout the Southeast. Since its inception, Crown Bay has owned and operated a multifamily portfolio of 3,655 units valued at more than $270 million.    

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THE APPEAL OF MULTIFAMILY WORKFORCE HOUSING

Our investment strategy focuses primarily on multifamily workforce housing. What is that, and why is it our strategy?   What? Multifamily workforce housing generally includes Class B and C properties, which are mostly older communities with limited amenities and basic interior finishes. They tend to be located in suburban areas and are often low-rise or garden style construction. The rents are affordable to lower-middle and middle-income families with jobs in fields like construction, healthcare, retail, transportation, government, office adminis­tration, hospitality, education, nursing, and the police force. Note these communities are not government-subsidized housing. Renters in these communities are often renters by necessity instead of by choice.   Why? Let’s take a closer look at the fundamentals.   Demand   There is demand across nearly the entire renter spectrum, and the demand does not appear to be letting up any time soon. While demand for workforce housing tends to come from households who make 60% to 100% of the Area Median Income (AMI), some households with higher incomes may decide to live in workforce housing due to proximity to a job, debt, saving for a home, etc. Some low-income households (<60% AMI) on vouchers or government subsidies also live in market rate workforce housing due to the shortage of low-income housing.   Most of these renter households tend to be “renters by necessity.” They may have aspirations of owning a home, but may not have the financial means. For the past decade, housing prices have risen faster than median household incomes, putting home ownership out of reach for most. It is becoming increasingly difficult, especially in large metros, for workforce housing renters to purchase a home near the area in which they work which also suits their family’s needs. Moreover, fewer starter homes are being built due rising to land costs and construction costs. Multifamily rents have risen too, albeit not as fast as single-family home prices, making it even more difficult to save for a down payment. This cycle is keeping households in the renter pool for longer.   Supply   Land, labor, materials, and regulation are driving up the cost of new construction. Rising costs are not new, but the topic is carrying more weight because of the rapid increase. It took almost 60 years, from 1940 to 1998, for the national RSMeans Construction Cost Index to climb from 0 to 100, but only 20 more years to climb from 100 to 200, doubling the index’s measure in one-fifth of the time. At no other point in America’s history have construction costs accelerated so aggressively (CBRE Research, Southeast Construction Costs, 2019).   Rising construction costs means higher rents are required to justify new construction. In other words, for real estate developers to turn a profit on a multifamily development, they must focus their attention on the upper-end of the rental market. For the past decade, essentially all new development has been Class A luxury. For context, the Class A market makes up only 20% of the total rental market. Building affordable market-rate units is just not financial feasible, and likely won’t be for some time. For this reason, there’s been virtually no new meaningful workforce supply added this past decade. In fact, not only has the total workforce housing supply not increased — it’s actually decreased, with older units being torn down to make room for Class A construction.     As shown above, in metro Atlanta, the total number of Class A units increased by 84% from 2000 to 2019 while the total number of Class B/C units decreased by 3%. Every year some of the oldest product is leveled to make way for new Class A development or other higher and better uses of the land. Importantly, though, occupancy rates for Class B/C surpassed Class A, as shown below.   Conclusion   Our strategy makes sense because strong workforce housing fundamentals — strong and growing demand, coupled with steady to declining supply — are driving rent growth and, in turn, cash flow to investors.   Few market rate solutions exist to add new supply. Legislators are focused on housing solutions for the low-income households (<60% of AMI), while developers and institutional investors are focused on the only segment whose rents can justify their construction costs: the high-end renters. Opportunities abound in the middle, and we can capitalize there.   Investing in workforce housing isn’t without risk, of course. Investors must consider housing affordability (i.e., are renters able to absorb rent increases), resident credit risk, rent control policies and other widespread public programs that may improve the supply/demand imbalance. Despite the risks, given the fundamentals described above, we feel confident that workforce housing is and will continue to be an attractive strategy for Acorn Property Group and our investors.   Source: CBRE, The Case for Workforce Housing – A Market Perspective, November 2018 Source: CBRE, Southeast Construction Costs, 2019/2020 Edition

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MULTIFAMILY PRODUCT TYPES

When talking about multifamily properties, there’s often a lot of jargon used. As an investor, it will be helpful to understand the general characteristics of the three multifamily product types, the four main investment strategies, and the three classes of multifamily real estate. While none of these definitions is absolute, they should help frame your understanding of an investment opportunity.   Product Types   Multifamily product is typically categorized as garden-style/low rise, mid-rise, and high-rise.                 1.Garden/Low Rise 2-4 story walk up Oftentimes repeated floor plans Constructed of wood frame on top of concrete slab Mostly suburban locations Low density Surface parking                 2.Mid-Rise 5-8 stories with elevators and central halls for apartment access on each floor Constructed of steel frame or reinforced concrete Mostly urban locations                 3.High-Rise Above 8 stories Constructed of steel frame or reinforced concrete Mostly urban locations High density Parking is likely at grade but below the first floor of the building (which may sit on a podium), in a full-fledged parking structure, or in a below-grade parking garage   Investment Strategies   Real estate investment opportunities vary across the risk/return spectrum, but generally fall into four categories, from lowest perceived risk to highest risk: Core, Core Plus, Value-Add, and Opportunistic. For these strategies, think of risk this way: it’s the possibility that future investment performance may deviate over time in a manner that is not entirely predictable at the time of the investment.   1.Core A Core strategy has the lowest perceived risk/return profile. Core investors typically take a longer-term view of commercial real estate investing, use low leverage (30% to 50%), and value predictable cash flow. Income makes up a majority of the total return. Core multifamily is typically newer, high quality, stabilized assets in primary markets which trade at the lowest cap rates. The performance of Core is most influenced by market cycle timing and market fundamentals.   2.Core-Plus A Core-Plus strategy has a moderate risk/return profile. Core-Plus investors use moderate leverage (55% to 70%), and they are drawn to the stable cash flow and value add component. An example of Core-Plus multifamily is a stabilized apartment community with below market rents in need of light renovations.     3. Value-Add A Value-Add strategy has a somewhat more elevated risk/return profile than Core-Plus. Value-Add investors use 65% to 80% leverage, and they acquire under-performing assets with physical and/or operational deficiencies. Most value-add assets tend to be older. Value-add business plans usually involve curing deferred maintenance, upgrading the property and tenant base, improving management, and raising rents. These investments typically offer low initial yields while the property is being re-positioned, but once the business plan is executed, the increase in cash flow and appreciation can be significant.   4. Opportunistic An Opportunistic strategy has the highest risk/return profile. Investors who acquire opportunistic investments tend to use moderate to high leverage. Examples includes ground-up development or a very comprehensive repositioning. These investments don’t offer yield in the early years, but once the plan is executed, offer investors significant yield and appreciation. These projects are typically the most complicated and require daily oversight.   Classes There are three classes of real estate: Classes A, B and C. I’ve included a fourth (Class D), as you’ll sometimes hear it discussed in the industry.   Class A New construction or very high quality renovation Prime location High occupancy level High end finishes and amenities Attracts Core investors Class B 1980s to 2005 vintage Average to good location Stabilized occupancy level More limited amenities and basic unit finishes and fixtures compared to Class A Minor to no deferred maintenance Attracts Core-Plus and Value-Add investors Class C 1970s to early 1980s vintage Average to good location Outdated or original finishes and fixtures Some deferred maintenance Attracts Core-Plus, Value-Add, and Opportunistic investors Class D 1970s or earlier Declining growth area Outdated or original finishes and fixtures in need of replacement Significant deferred maintenance Management issues Most investors usually pass these opportunities

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