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

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

Why Adding Commercial Real Estate to Your Portfolio is Good (and Multifamily is Better)   “Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.” — Andrew Carnegie, billionaire industrialist     Many people think of investing as selecting a basket of stocks and bonds and hoping for the best. The reality is that investment portfolios that focus on just stocks and bonds force investors to compromise — either by sacrificing return for lower volatility or enhancing return at the expense of higher risk. Here are some reasons we believe investing passively in real estate is good (and multifamily is better!).   Diversification   Commercial real estate, which includes multifamily, has almost no correlation to stocks and a slightly negative correlation to bonds. That means the asset classes don’t move together which is the key to diversification.   In 17 of the 20 worst quarters for a 60% stock / 40% bond portfolio, from 1978 to 2012, private real estate (measured by NCREIF index) had positive returns. Why? Commercial real estate returns are largely driven by different economic risk factors than stocks and bonds.   Most Resilient Property Type to Recessions   Multifamily is the most resilient property type to cyclical downturns, according to CBRE Research, as measured by rent changes during and after the past two recessions (2001 and 2008-2009). They found that multifamily rents were in a negative growth trend for a shorter period of time, recovered quicker, and far surpassed the previous highs.   Historical performance isn’t always indicative of future performance, and each recession is different. The amount of oversupply certainly impacts recovery time. It’s reasonable to assume during and shortly after a recession, multifamily rents will likely decline to some degree, but that decline is usually short-lived and followed by a strong rebound and growth beyond the previous peak rents.   Cash Flow   In multifamily, after tenants pay rent and property expenses and the mortgage are paid, the remaining cash flow is distributed to investors, usually quarterly. Bonds and dividend yielding stocks provide some yield but it’s low. It’s common in a real estate syndication for passive investors to earn a preferred rate of return in the 6-8% range, plus a majority share of the profits.   Tax Benefits   For tax purposes, real estate owners can deduct mortgage interest and depreciation from property’s Net Operating Income (NOI). This benefit can be passed on to all investors in a real estate syndication. The result is the investor likely won’t pay any taxes on cash distributions until the property is sold, at which point they will pay a lower blended tax rate than their ordinary income tax rate. It’s important to note that an investment in a REIT, which is a real estate flavored stock, does not provide this tax benefit.   Shorter (and Staggered) Leases Allows Flexibility   Multifamily leases are typically 1 year versus 5+ years for retail, office, and industrial. Short-term leases and staggered lease expiration dates means consistent volume of leasing activity, both new leases and renewals, which often leads to higher average occupancy rates, and steadier cash flow. The shorter-term lease structure gives the owner the advantage of adjusting rents upward more quickly in a tight market or after making value-add improvements to the property.   Diversified Credit Risk   Multifamily properties have many leases, and each lease only represents a small portion of the overall income. The tenant default risk is therefore spread out across many tenants. This gives multifamily a distinct advantage over office, industrial and retail assets, each with much fewer tenants.   Lower Tenant Turnover Costs   Apartment unit turnover requires only minimal investment to get the unit physically “rent ready.” Additionally, downtime between leases can be days or weeks. By contrast, there are significant costs associated with new leases and renewals in office, industrial, and retail (e.g., tenant improvement allowance and leasing commissions). Downtime between a move-in and move-out in those asset classes can be months (or longer!). During that time there is no revenue, which significantly impacts investor cash flow.   Favorable Loan Terms   Loan terms and interest rates are more favorable for multifamily than other property types due to lender comfort with the asset class and its lower volatility. In addition to the banks, life insurance companies, and CMBS lenders who provide debt, the multifamily sector also benefits from the government-backed lending programs (GSEs) not available to other property types. Fannie Mae, Freddie Mac, and the FHA are major sources of non-recourse debt capital and liquidity. The GSEs have an especially strong appetite for lending on properties that are affordable to lower and middle-income families.   Basic Need of Shelter   After the grocery bill, the next thing people pay is rent. Investing in multifamily communities is investing in the basic need of shelter.   Sources: CBRE Research, U.S. Multifamily Research Brief, Multifamily Most Resilient Property Sector to Recessions   Sources: CBRE, U.S. MULTIFAMILY HOUSING: A Primer for Offshore Investors