ArborCrowd recently hosted a webinar to discuss its deal selection process and approach to underwriting.
The webinar panel featured ArborCrowd’s Chris Moser, Director of Acquisitions; Neil Patel, Director of Investor Relations; and Chris Forte, Director of Asset Management. The webinar was well attended and delved into many interesting topics around ArborCrowd’s unique and disciplined approach when choosing potential opportunities to offer to investors.
Some of the topics addressed were:
[2:05]: Chris Forte, Director of Asset Management, talks about ArborCrowd’s track record: “To date, we’ve closed nine deals, have raised over $30 million of equity, we’ve returned over $10 million of equity to our investors, we’ve been in deals for both value-add strategy as well as ground-up construction, and thus far, two deals have been fully realized and come full cycle — both exceeding protected returns.”
[3:05]: Neil Patel, Director of Investor Relations, discusses why the deal selection process matters: “We do strongly believe there can be real consequences if proper underwriting doesn’t take place. There are a number of things that can go wrong… We are not afraid to pass [on] any deal as the numbers have shown. If it doesn’t make sense, we just simply don’t put it onto the platform.”
[23:51]: Chris Moser, Director of Acquisitions, discusses the ability to find good deals during all stages of a market cycle: “We see that slow to moderate growth still leaves for a large opportunity for specific markets that have strong demographics and diverse economic stories. So, we think that while we potentially might see a slowdown in the overall apartment market, there’s still many opportunities to be had to find good deals if you look in the right markets with the right sponsors.”
Frequently Asked Questions
Why does ArborCrowd prefund the equity in a transaction?
From an investor standpoint there’s some solace that should be taken that we’re prefunding. One of the biggest issues that sponsors have with crowdfunding is the lack of certainty of closing. Most platforms cannot assure sponsors that they will raise the required equity for a deal, which leaves the sponsor in limbo and at risk of failing to close on the deal – possibly costing them vast sums of money. ArborCrowd eliminates this risk by writing the check at closing. Additionally, because ArborCrowd’s affiliate equity is invested in the deal, ArborCrowd is incentivized to rigorously underwrite the transaction as if it will be the owner, not a mere conduit between sponsors and investors. After all, if ArborCrowd is unsuccessful in raising the equity from its investors, its affiliate will still own an interest in the deal. This alignment of interest between ArborCrowd and its investors is a key differentiator of our business.
What would make an investment go through the entire underwriting process but not end up on the platform?
While a deal can have strong fundamentals with an experienced sponsor at the helm, it must make financial sense for our investors. Sometimes, we really like a deal, but the sponsor is looking to capture too much of the upside potential from our investors. This may result in a net return to investors that is not appropriate for the asset type, market and business plan. In that case, we will pass on the deal.
What do you specifically look for in “comps” when you do your site visits?
It is crucial to understand the competition in the market so you can determine what rents you can charge and what exit price you can reasonably expect to achieve. Some of the items that the ArborCrowd acquisitions team looks for when visiting a comparable property is the age of the property, the finishes, such as granite countertops and stainless-steel appliances, and the amenities being offered. We also look at the property management — is it a sophisticated company or a mom and pop operation? Unit sizes and layouts are also very important considerations. Finally, we consider the comps’ location by analyzing its distance from major employment centers and area amenities. All of these factors are taken into account when we determine what rent and exit price to underwrite to in our pro forma investment model.
Do you take the underwriting from the sponsor and just apply that in your selection process?
When we get the initial financial underwriting from a sponsor, we look at it as a starting point, especially during the “screening phase” where we are looking to quickly weed out weak transactions. However — and it goes back to prefunding — since an ArborCrowd affiliate is putting its own capital into the deal, we never rely on the sponsor’s underwriting to decide whether to offer a transaction on our platform. We perform our own rigorous underwriting to ensure we are comfortable with the deal.
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