In this issue:
- News & Announcements
- Overview of our new investor-friendly flagship fund: Tempo Opportunity Fund LLC
- Income & Growth Case Study: Mount Prospect Greens Apartment
- How to get a copy of my new book, ‘How to Choose a Smart Real Estate Investment Fund’
What’s New in 2017?
The Tempo Opportunity Fund LLC
The partners at TF Management Group LLC launched the Tempo Opportunity Fund LLC early in 2017.
Why, you might ask, go through the expense and hassle of launching a new fund?
In a word, opportunity.
Throughout 2016 we kept getting requests to finance equity and long-term deals (not just hard-money loans) from a number of clients we’ve worked with in the past.
As the year went on, it became clearer that in the current market, there are high-quality deals out there in the equity space that we were missing out on as long as we limited ourselves to hard-money lending, which had been our mainstay for years.
Beyond missed opportunities, some of the yields in the hard-money space have been compressing due to quasi-institutional money flooding the marketplace, so we concluded that being solely in the hard-money space wasn’t good for long term growth.
From that combination of push and pull, the Tempo Opportunity Fund LLC was conceived.
From Idea to Reality
Once the Managing Partners agreed that a new approach was needed to maintain acceptable, risk-adjusted returns for our investors, we began the process of setting up a new fund in late 2016. We completed the securities filing in Q1 of 2017 and got commitments from initial investors. Then, in April of 2017, we closed the first round of capital ($1.38M). As of October 1, the Tempo Opportunity Fund LLC has $2.3M subscribed, and there are multiple new investors who made capital commitments to the fund.
Five Reasons Why The Tempo Opportunity Fund LLC Is Now Our Flagship Fund:
- Investor-friendly structure (e.g. the fund receives all origination points and fee income, no asset-level fees and emphasis on growth, income and capital preservation)
- Better alignment of long-term interests of fund managers and investors
- Addition of growth-focused equity investments into the mix while continuing to leverage our network of sponsors and deal operators
- Continuity: in order to maintain the income aspect of our previous fund, we’re still lending on short-term fix-and-flip projects
- Diversity of asset types, geography, and sponsors
Case Study: Income Growth
To give you an example of what the Tempo Opportunity Fund LLC is investing in in order to achieve both income and growth for our investors, let’s take a look at the Mount Prospect Greens Apartments project we have invested in.
This Chicago-area project was an under-performing apartment complex with 344 aged units. The area supports significantly higher rents. So, this became an excellent value-add opportunity, with significant cash-flow improvement, as well as the overall asset value.
Improvements to the apartment complex include:
- Renovating a majority of the apartments
- Building a new clubhouse and adding in a gym
- Improvements to the common facilities
Unique Approach to Rehabbing the Units
The Mount Prospect Greens project sponsor has a unique rehab system in which tenants have their apartments renovated while they live in them. How does that work? The key is speed. The tenants go to work and then the crews come in. They move all furniture, cover it, and then they renovate a unit within a day or two, focusing on high-impact areas like kitchen cabinets and appliances and fresh paint. If the renovations aren’t done within a single day, they put the tenant in a hotel for the night.
It’s difficult to believe, but in one day of renovations you can add quite a lot of value. The property will look cleaner and newer. They’re able to increase rents, on average, 17% versus the previous rent.
The key advantage of this approach is that income, which flows back to our fund investors, remains constant throughout the renovation process since tenants aren’t being displaced.
Exit Strategy for Mount Prospect Greens Apartments
Once the facility renovations and all other capital improvements are complete, the property will become more attractive to potential investors.
The exit strategy will be to continue to increase the value for two to three years, then sell. The likely buyers will be either a local investor or a corporate buyer. Corporate buyers often are looking for these type of apartment complexes.
The potential growth in value is significant, and that profit will be distributed to the fund investors in a cash payment at the time of sale.
Keep in Mind: Our Fund Investors’ Return Comes From Two Sources
- Cash-Flow: Coming from rent/income derived on equity projects, origination fees on loans and interest received on loans.
- Unrealized Gains: Coming from appreciation, which will get monetized at the time of sale.
How Does That Put Money in Investors’ Pockets?
On exit, the fund will realize the appreciated value of the property. When the resale is complete, those gains will convert to real cash and investors will receive cash through distributions for the quarter following the sale of that asset.
In the meanwhile, we are recognizing increased value of the renovated apartments/buildings, increasing fund unit price at the pace justified by the made improvements and growth in the cash-flow.
Keep in mind that the underlying mortgage is paying down over the hold period while we’re forcing further appreciation through the improvements to the property. Furthermore, we are able to recognize depreciation deductions, reducing tax liability against cash income received.
Plus, on the resale, the investor gets to treat the return as long-term capital gains, which may be taxed at a lower rate.
When you invest in Tempo Opportunity Fund LLC, and the fund invests in long term assets like the Mount Prospect Greens property, you get the benefits of owning an individual property (Depreciation, Amortization, Appreciation, Cash-flow), but with the diversification among many other properties.
Want to learn more about our approach with the Tempo Opportunity Fund LLC? Contact us and we’d be happy to discuss the unique advantages of the fund with you.
Want a copy of Mike Zlotnik’s new book?
Thanks for reading,
CEO, TF Management Group LLC
TF Management Group LLC (TFMG) is an investment fund management company that specializes in both short-term debt financing for real estate “fix and flip” projects, and long-term “value-add” equity deals.