By Jon Peterson
Irvine and San Mateo-based SARES REGIS Group has received a $50 million commitment from the Ohio Bureau of Workers Compensation Fund for its SARES-REGIS Multifamily Value-Add Fund II. This is a commingled fund that has both Northern California and greater Seattle among its targeted investment markets.
The fund manager is looking at a total equity raise of the commingled fund of $250 million, according to a board meeting document received from the Ohio BWC. One other investor in this fund is the New Mexico Educational Retirement Board, which made a $30 million commitment to the fund last year.
A final close on the commingled fund is planned for this summer, and the amount of leverage planned for the fund is approximately 65 percent. There should be around 16 to 20 properties acquired for the fund.
The targeted gross IRR returns for the fund are a gross levered IRR of at least 16 percent, with 35 percent of this return coming from the property’s current income. The commingled fund will be buying existing Class-B apartments that could be a mixture of garden, mid- and high-rise properties. It favors properties that are in an in-fill location, have high barriers to entry, access to employment, transit, shopping, entertainment and recreation.
SARES REGIS sees there are strong investment opportunities for the kind of assets it wants to buy. “While the real estate cycle for new development of multifamily properties is moving toward the later innings, opportunities to renovate and reposition well located, older properties that have been undercapitalized and/or under managed are abundant,” says Ken Gladstein, president of the SARES REGIS Multifamily Fund.
The commingled fund is planning to invest in properties that have strong potential for value-creation. This would include assets that are under-managed, are poorly capitalized, have deferred maintenance, are in need of cosmetic or physical updating, have a distressed owner or capital structure, have curable construction or structural deficiency and are bank-owned.
The markets it will be buying into are projected to have very strong rental rate growth for 2016. The document from the Ohio BWC stated that rental rate growth for San Jose is projected to be 10 percent and a little over 8 percent in Seattle for this year, according to data from CoStar.
Another factor is that the many of the western markets the fund will be buying in are some of the least affordable areas in the United States in regards to mortgage payments when compared to average rents, as stated in a board meeting document from Ohio BWC. For San Francisco, the second quarter 2015 monthly home payment was $6,489 versus $2,891 average apartment rent for the same time period. For Seattle, the difference was $708 with the monthly home payment of $2,033 and the average apartment rent of $1,325.
SARES-REGIS has acquired one property for Fund II. In September of last year, the fund acquired the 229-unit Rancho Corrales complex in Simi Valley, Calif. The purchase price was $265,000 per unit or $60.7 million, according to the board meeting document. The fund made a $22 million equity investment into the property. The average cash-on-cash yield for the property is 7.7 percent.