Sanctuary Advisors Distressed Fundx


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Sanctuary Advisors Distressed Fundx

  1. 1. SANCTUARY GROUP, LLC Sanctuary Advisors, LLC Multifamily Opportunity Fund Distressed Asset Ownership Fund Jeffrey W. Adler and Jack G. Kern 3/22/2009 The Membership Interest presented in this document has not yet been registered under the United States Securities and Exchange Act of 1933, as amended, or under any other applicable Federal or State Securities Laws. Such interests may not be sold, assigned, pledged, or otherwise disposed of without effective registration or an applicable exemption.
  2. 2. Contents Executive Summary ................................................................................................................. 5 New Property Fund to Acquire Residential Apartments .................................................. 5 Experienced Investment team with a track record ............................................................. 5 Sanctuary Advisors, LLC Opportunistic Multi-family Investing ..................................... 6 Direction of Multi Family Valuations in Private and Public Markets.............................. 7 Entry Points for Acquiring Distressed Assets...................................................................... 7 Meaningful Time Horizon and Opportunity to Invest ...................................................... 8 25% to 30% IRR Target ............................................................................................................ 8 Introducing Sanctuary Advisors............................................................................................ 9 Business Philosophy: ............................................................................................................. 10 Competitive Strengths: .......................................................................................................... 11 The Five Major Differentiating Factors: .............................................................................. 11 Target Consumer Market ...................................................................................................... 13 Fund Returns & Expenses..................................................................................................... 19 Targeted Markets for Fund Acquisition ............................................................................. 20 Value Added Case Study #1 : Broadcast Center, West Los Angeles, CA ...................... 21 Value Added Case Study #2: The Crescent at West Hollywood .................................... 23 Projections and Statements ................................................................................................... 24 Appendix: The Multifamily Investment Market ............................................................... 30 Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 2
  3. 3. U.S. Multi-family Property Vacancy Rates......................................................................... 32 Demographic Changes in the Numbers of 20-34 year olds/households of 20-34 year olds (actual and anticipated)] ............................................................................................... 32 Supply of Multifamily Becoming Constrained .................................................................. 33 Construction Starts and Originations for Multi-family Properties................................. 33 US Monthly Change in Employment (‘000 jobs) ............................................................... 34 IRR Expectations by Market ................................................................................................. 35 Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 3
  4. 4. Sanctuary Advisors, LLC Sanctuary Advisors is part of the Sanctuary Group, LLC (after formation, 2009) Plan Sponsor: Sanctuary Advisors, LLC 88 Inverness Circle East, Suite H104 Englewood, CO 80112 Office: 303.662.1080 Mobile: 303.618.9738 Synopsis: This is a private placement offering for a closed-end multifamily “distressed opportunity” value added real estate fund that seeks to raise $200MM in committed equity capital. Sanctuary Advisors, LLC is a start-up operation with a specific detailed operational plan based upon the experience of its two principals, Jeff Adler, former Chief Property Operations Officer at AIMCO (NYSE: AIV) and Jack Kern, former Director of Research at Archstone-Smith (NYSE: ASN). Their experience and the plan described below is the main reason why the sponsors believe they can deliver outsized returns to the fund’s investors. This is a confidential business development plan. Questions regarding this plan should be directed to Jeff Adler, Chief Executive Office, Sanctuary Group, LLC either at the phone numbers listed above or by email. The report contains copyrighted, proprietary information from a wide variety of industry sources that cannot be shared beyond those in possession of this plan. Please help us to preserve the rights of the copyright holders by not distributing this document to anyone without the expressed written permission of Sanctuary Group, LLC. Chief Executive Officer Managing Director Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 4
  5. 5. Executive Summary New Property Fund to Acquire Residential Apartments Sanctuary Advisors, LLC (the quot;Fundquot;) will be established in Denver, Colorado in 2009 and will act as advisor and sponsoring investor, for the acquisition of existing multifamily rental properties. The Fund is being set up to invest in multifamily residential rental properties across the United States, focusing on institutional investment grade metropolitan areas, high growth submarkets and special situations. The Fund is targeting a total equity capitalization of US$ 200,000,000 with appropriate agency, non-recourse leverage to enhance returns. Targeted IRR returns are 25%-30%, which assumes assets can be identified at an effective asset value discount of 30% from current 1Q2009 prices levels (or a 250 basis point cap rate discount), which equates to a 10.0% to 10.5% cap rate. We expect to raise funds in 2009 and then deploy the funds sometime in the first half of 2010 when we expect overleveraged borrowers who accessed the CMBS market in 2005-2007 to run into trouble. Experienced Investment team with a track record Sanctuary Advisors, LLC will function as the Property Fund Adviser. The two key managing principals both have long, successful multifamily residential property track records and have held senior level positions with publicly traded real estate investment trusts, representing several hundred thousand units owned, operated, improved and traded over their tenure. • Jeff Adler, an industry veteran, was previously the Chief Property Operations Officer at AIMCO, the largest multi-family owner/operator in the U.S. of both stabilized properties (180,000 units) and repositioned properties (20,000 units) with a production rate of 5,000 units per year. During his tenure (2002-2008) Jeff turned around and revitalized the AIMCO operating and redevelopment platforms around the twin pillars of a) forward looking data driven decision making and b) a strong emphasis on customer experience. In addition to his Operating role, Mr. Adler was also on the AIMCO Executive and Investment Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 5
  6. 6. Committees, presenting regularly to industry analysts, investors, bankers, and the AIMCO Board of Directors. He has been featured in numerous industry articles and events. • Jack Kern who has 20 years of industry experience and was formerly director of research with the third largest REIT in the US. Jack’s background is in development and investment operations, having concluded 105 transactions. Jack also serves as our Government Relations liaison. Based in Washington, DC, Jack has extensive contacts with US Government Agencies and CMBS special servicers. Jack is currently the Vice-Chair of the Research Committee of the National Multi-Housing Council, Vice-Chair of Multi-housing World and is a frequent speaker at industry events. Sanctuary Advisors, LLC Opportunistic Multi-family Investing The Fund’s core strategy will be to acquire properties at an effective 30% discount (or 2.5% cap rate discount) through a series of “entry points” that enable us access to these distressed assets. In screening potential acquisitions, we will first evaluate whether they exist in the city markets and sub-markets that we would have desired to invest in if we had purchased them at market level cap rates. We will then determine whether a value added opportunity exists (increase in capital expenditures to increase rents). Assuming these two screens have been met, we will then evaluate the ability to purchase the asset at a discount to currently prevailing valuations as a result of a special situation. Once we acquire the assets, the operational plan will be exactly the same as if we had acquired it at market level cap rate, which presumes a value added redevelopment and a 5 year average hold period. Given that the CMBS market was very loose from 2005-2007, we expect that the investment window will be 2010-2011 as a result of two factors: (1) the downturn in apartment NOIs caused by the recession and (2) the inability to refinance the debt at a 70% Loan to Value ratio as result in the decline in apartment values of 30% (Cap rate increase of 250 basis points- from 5.5% to 8.0%), which has already occurred from 1Q 2007 to 1Q 2009. Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 6
  7. 7. Direction of Multi Family Valuations in Private and Public Markets Publicly traded Apartment REITs are currently (March 2009) trading at implicit cap rates of 9%-11%. They are active sellers into the private real estate market, where cap rates are trading at much lower levels. Private Market cap rates are transacting at 7.5%- 8.0%, although the number of transactions are about 30% of the level as in 2007. Private market buyers currently are comprised of smaller, family owned enterprises, who can take advantage of real estate tax depreciation to shelter earned income, with institutional/private equity players awaiting a dramatic correction in multifamily asset prices. We do not think private market cap rates will revert to 10% overall, as long as the GSE’s continue to profitably make 65% LTV, 6% interest, 10 yr term debt at 1.25 Debt Service Coverage ratios. With solvent buyers/sellers freely transacting at 7.5%-8.0% cap rates, and no impetus to force cap rates higher, the only opportunities to achieve 25%-30% IRR returns will be to access overleveraged owners and distressed situations that will give rise to price discounts of 30% Entry Points for Acquiring Distressed Assets 1) Data Driven Acquisition Targets- through relationships with rental survey and financial database providers, we have accessed data that provides us with a list of multifamily properties that are both operationally underperforming and financially overleveraged. We have sorted this list by geography, and will use it to proactively target acquisition candidates and their lenders. 2) Governmental Agencies- through Jack’s relationships with governmental agencies, we will be in a position to access problem assets of the commercial banking system. 3) CMBS Special Servicers- we expect the CMBS market to be the epicentre of distressed assets in multifamily. We have established relationships with the special servicers to assist them in stabilizing the assets when it goes into default, which will provide access for assessing value and executing transactions 4) Consultants- through Jeff’s network of relationships with owner operators and consultants to major US Banks, we expect to be able to be in the middle of the deal flow when the number of distressed situations increase. Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 7
  8. 8. The Fund has established partnerships with a limited number of property mgmt companies who will co-invest and employ Mr. Adler’s operating strategy. This includes a limited number of highly specialized owners and developers with a strong geographic track record in the targeted markets. Meaningful Time Horizon and Opportunity to Invest Fundamentals: The underlying demand for rental housing has been, and is anticipated to keep, increasing while new supply is expected to fall in the short term. Demographically, the core 25-35 age group will continue to grow until 2015 (this age group has a high propensity to rent, which will buttress demand), in addition to the 1.3 million new households being formed each year in the U.S. Demand is further enhanced by a reduction in households leaving the rental pool and buying homes, as a result of tighter mortgage underwriting criteria (credit scores and down payment, cash closing costs) , and the expectation that homes will not appreciate in value for some time. Reductions in employment levels in 2009 and 2010 will mask these positive trends. The supply of property has been impacted by recent market trends, with new construction of both single family and multi-family properties seeing a decline of at least 30% [to date] in 2008. Sanctuary Advisors believe that these positive supply and demand dynamics should underpin average rent inflation of three to four per cent per year or more, and ensure that vacancies remain at moderately low levels, over the five to ten year anticipated investment horizon 25% to 30% IRR Target It is expected that the winding up of the Fund will take place in stages, beginning five years after the First Closing Date, (with a maximum lifespan for the Fund of ten years). The Fund is targeting a pre-tax IRR of 25% to 30% after fees over an assumed five year lifespan. The fund’s IRR assumes flat overall market rental growth, entry cap rate at an average 10.5% and an exit cap rate of 8%. If the entry level cap rates are not attained, we Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 8
  9. 9. will give investors the opportunity to convert to a 15%-18% IRR value added fund, or return of capital. Introducing Sanctuary Advisors Mission Statement: Apply the two founding partner’s proprietary skills in U.S. Multifamily rental property acquisition, redevelopment, research and management to create value for investors, team-members, and community members by managing extraordinary consumer experiences in the local multifamily markets within which we operate, and by doing so, promote sustainability, environmentally sensitive practices and make the renter’s world a better place. Goals and Objectives: We are founded on three major pillars: 1) Strong financial results- we intend to generate quality earnings and deliver a strong brand promise so that the financial results will reflect our commitment to providing our investors and partners with substantive returns, both financially and in providing quality living environments for members (residents). 2) Significant Social and Customer Impact- we believe that improving the quality of life of our community members, in ways relevant to them, will be rewarded with lower costs, higher retentions, and higher sustainable revenues. This belief is based on many years of experience along with evidence from our proprietary consumer research. We leverage the extensive knowledge we have about resident goals, needs and desires, and continue to listen, so that we deliver those products, services, and experiences that they value the most. By being stewards of environmentally sustainable, well managed communities, we contribute to the stability of the cities and regions in which we operate. 3) Environmentally Responsible- we believe that reducing energy consumption and reducing the environmental footprint of our properties, while involving community members as active participants in this journey, will create both a competitive cost advantage as well as bringing our community members together with an added sense of shared purpose. Residents consider their apartments “home” and our emphasis on socially conscious management builds on the value proposition in place when they’re selecting a primary residence. Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 9
  10. 10. The initial Fund objective is to raise $200MM in initial equity capital at a 70%-75% leverage using agency non-recourse debt, at a minimum 1.25 DSCR. This would provide an enterprise value of around $800MM. At approximately $70,000 per unit in value, this would indicate a total enterprise size of approximately 11,000 units. By way of comparison Mr. Adler led an organization (AIMCO) of 160,000 units, of which 20,000 were under active re-development. Exit Strategy: We anticipate that the liquidity event for the funds investors will be: a) Sell the property subject to continuing property management agreement, to ensure the longevity and endurance of the customer experience b) Sell the interest in properties to other investors who will invest in the next level of value added repositioning. c) Take the company public d) Sell the portfolio We fully expect, as the organization gains in maturity, to be a sponsor of multiple funds to provide expansion capital. Business Philosophy: Globally, the apartment industry is viewed not as a consumer service, but a financial capital intensive commodity where value is derived from location analysis, capital features, and financial leverage. While these factors play a major role and have been the primary way multifamily real estate has been run, a missing value driver has been that the apartment sector is also a consumer service business. This differentiates apartments from other real estate sectors, and creates an opportunity to create value which has been largely overlooked. We therefore believe that apartment home investment, redevelopment, and management is both a calling and a career- only those people who see their purpose as imbued with both a mission and set of financial objectives will be a part of this organization. Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 10
  11. 11. The consumer nature of the apartment business allows for competition to occur on two planes: the rational and the emotional. On the rational side are such elements as location, common area and apartment amenities, and maintenance service execution. In this arena, the sponsor has leveraged tools from his experience in other industries and real estate partnerships to improve investment selection and operating performance. On the emotional side is the opportunity to create an resident environment that meets the emotional needs of different customer segments, create metrics that optimize performance for each of the segments, as well as a team of people that through structured programs can evoke the emotions by which different groups of consumers will either stay longer or pay more. Over the course of 2007/2008 the sponsor conducted and concluded research which will provide the venture with a highly proprietary and competitive advantage. In each area, the sponsor has developed proprietary information which will allow the sponsor to generate higher, more sustainable, less risky returns than competitors. Competitive Strengths: Many ventures investing in market rate value added multifamily communities bring financial skills to the table. This venture not only does that but brings deep operational experience, expertise based upon founding partner Jeffrey Adler’s, leadership skills and personal experience in the Acquisition, Operations, and Redevelopment of multi-family communities. Mr. Adler’s experience in turning around and leading AIMCO, the largest multifamily owner/operator in the U.S. of both stabilized properties (200,000 units) and repositioned properties (20,000 units with a production rate of 5,000 units per year) gives the venture the depth to handle 8,000-10,000 units easily. The venture also has, as its partner and investment research director, Jack Kern, who has 20 years of experience in real estate and performed a similar function at Archstone-Smith from 2001-2007, and the renowned Charles E. Smith companies prior to that. The Five Major Differentiating Factors: 1) Investment Thesis- our investment philosophy is predicated on the U.S. demographic and societal trends that favor multifamily housing in the next 5-7 years and beyond. Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 11
  12. 12. a) Demographics- the age cohort 20-35 will be growing dramatically over the next 7 years increasing the number of prime age renter households. At the other end of the spectrum, the Baby Boom generation has begun retiring, and their active lifestyles will draw them to major coastal, educational, and cultural centers b) Mortgage Credit - The mortgage credit losses in the single family sector will mean that single family ownership will be delayed as the required down- payment will rise. Additionally, consumer confidence in homeownership has never been so low, as prospective home purchasers wait to see when home price appreciation will return in a measurable way. While single family renting will be an outlet for some families, it will not replace the desire to own. c) Economic Growth - The increased accumulation of economic growth in the top 10 major U.S. metroplexes - most new economic growth is driven by and surrounds the major global urban regions. In Who’s Your City?, economist Richard Florida lays out the thesis to demonstrate that major global cities are the engines of economic growth, and further, real estate prices and rents will increase faster there than the national and global averages. The central issue is not to overpay for that growth (which did occur in the most recent run-up in multifamily values). d) Transportation, Oil and Energy - The current level of oil/gas pricing and production- by all accounts, indicates that the marginal cost of oil production is about $49 per barrel, meaning gasoline prices at the pump of around $1.75/gallon as of this plan date. Over the medium term, we can expect prices to rise back to higher exploration and production costs, sufficient to bring forth alternative energy sources. The anticipated gains to $65 per barrel and $3.00/gallon pump prices are more likely than lower energy costs for any appreciable period. As a result, suburban infill and urban locations that do not require as much of a commitment to transportation expense will be more desirable, and enable a greater share of disposable income to be devoted to housing rather than transportation. This implies that people engaged in support services such as the medical, educational, public sector, and private sector front line managerial/administrative fields will increasingly be wedged between higher cost of housing driven by high knowledge “creative” workers Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 12
  13. 13. in major metro areas and increasingly expensive automobile transportation costs—driving a need for increased public transportation—the best form being light rail projects. e) Regional Planning- horizontal growth or “sprawl” is based upon low fuel prices, and public infrastructure/zoning to support it. This includes roads, public utilities, schools, shopping, and eventually government and commercial office space. Given the extreme distress in the capital markets and the dislocation of capital sources for shopping, office, and industrial sectors, and the long run movement of energy prices, we can expect that for the next 5-7 years the capital to fuel further sprawl will be less available, and that more suburban infill and mixed use projects will be preferred. Target Consumer Market We will target two segments with different product/service offerings using different brand positioning, as a result of the investment analysis performed below: Workforce Housing (incomes $35K-$60K) in suburban infill markets near public transportation (rail lines) as the primary targets Urban professionals and Empty Nesters (incomes >$100K) who desire a safe urbanized living experience, as a secondary target Therefore the investment thesis will initially drive to pick locations with the following characteristics: 1) Top 10 US cities with high percentages of high-end service industries (list attached in Appendix A 2) Along transit lines, major highways or suburban office, research and development centers, major healthcare and medical research, and educational concentrations 3) Emphasis on older, suburban infill or urban communities that can be affordably repositioned up one asset grade Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 13
  14. 14. 4) Properties where capital investment can be applied to reduce energy consumption and reduce the environmental footprint of the community 5) Locations that can be tailored to meet the needs of service support workers and first line managers (in suburban neighborhoods) or recent graduates, young professionals and empty nesters (in urbanized neighborhoods) We have added additional refinements to each of these criteria in later sections of this plan. 2) Deep Operational Experience- the venture is based upon applying the investment thesis to the deep successful operational experience the sponsor developed while Chief Property Operations Officer at AIMCO, and creating a culture that will enable the fulfillment of its full value creation. That culture combines a passion for people delivering a one-of-a-kind customer experiences with a quantitative, data driven orientation. In that capacity, the sponsor developed a number of management disciplines to enable value realization: a) Customer Driven- based on a solid foundation of proprietary consumer research, a focus upon the entire customer experience, which is measured with customer feedback direct to the site teams and visible to the leadership that enables higher retention, lower move in defect rates, and creates a competitive price premium. In that light, we do not refer to our customers as residents or tenants, but as “members”, much like an athletic or recreational clubs. We believe that the achievement of the fund’s financial goals will be the result of serving our members better than our competition. We will therefore establish annual customer experience performance goals based on customer experience surveys, and all team-members must meet these goals before variable compensation on financial performance will be paid. Based on the sponsor’s prior experience, a Net Promoter Score of 40% for rational and emotional factors will be a company goal. b) Forward Looking and Data Driven- every process step is analyzed and measured to enable detailed management of the four business pipelines: 1) revenue, 2) expense, 3) people, 4) capital spending Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 14
  15. 15. c) Scale- in the context of the new venture, an acknowledgement that true scale exists not at the operator level, but at the vendor/supplier level. Consequently, the venture will focus on partnering with vendors that can provide operational scale. In the context of the new venture, we have begun to explore opportunities to partner with organizations that can reduce the cost of operating and supporting multifamily properties while supporting the customer experience mission. Examples of these are outsourcing of the facilities maintenance function, partnerships with construction management organizations that perform unit upgrades, and the supporting functions of media placement, internet advertising, search engine optimization, revenue management, and property accounting. Given the sponsors’ deep industry contacts and knowledge, many opportunities have already been identified. d) People Driven- the culture of the team on-site and the organization that supports it is one of the critical differentiators in a consumer service business. The selection, hiring, on-boarding, training and development, and succession planning is in itself a series of processes that have been perfected, and the ability to recreate and apply it has been preserved. In the context of the new venture, we refer the on-site team not as employees but as “membership coordinators”, “business managers”, “community mayors”, or “facilities managers”. We elevate the team, because we elevate the community members. The sponsor has been approached by a major regional property management organization that is aspiring to a national presence. We have selected this organization to provide property management services, and in return, they have agreed to take direction from the sponsor in their management practices and processes and to go into other major metropolitan areas outside the Western US. While working with an established property management organization may appear to dilute the proprietary advantage of the venture, it also enables the venture to be operational with very little fixed cost and a sharpened focus on the drivers of value. Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 15
  16. 16. e) Product Driven- the physical component of the apartment community exterior and the interior of the home is an area that still has opportunities for optimization. a. Apartment home interiors product features - the sponsor completed research using decision choice modeling to have consumers in different segments create the set of features that resulted in the highest rent levels. This is the same kind of research that is used to design new hotel concepts and other consumer goods. The resulting outcomes provide a clear proprietary roadmap for including just those features (and associated price points) that create value for consumers and can be captured in higher rent levels. b. Environmental/Energy Conservation - sponsor has deployed environmental/energy conservation programs and has developed relationships with energy conservation program consultants to reduce energy consumption, providing real operating cost advantages for both the property and community members. We will leverage all public policy incentives associated with energy conservation. We will also make a point to communicate our commitment to sustainability to our members when they join and renew their memberships. c. Cycle Times - the sponsor developed cycle time performance metrics for unit turn production (redeveloped and stabilized) as well as quality standards. We expect a total cycle time of no more than 15 days to turn a lease an apartment home, whether the home has been redeveloped or is in a stabilized mode. d. Continuing Curb Appeal/Exterior Product Standards - the sponsor managed 5-7 years capital maintenance programs as well as seasonal maintenance to enhance performance. 3) Redevelopment Experience - the sponsor has led over 60 multifamily repositioning projects (20,000 units at a production rate of 5,000 units/yr) and developed skills in the selection, design, production, leasing, and operation of redeveloped market rate communities. Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 16
  17. 17. Those experiences have generated additional acquisition criteria for successful repositioning projects: i. Asset Quality Review- a thorough capital needs assessment must be performed, with an emphasis on the major building systems (roofs, siding, plumbing, HVAC, and electrical). Based upon the quality of the “bones”, an estimation of total unlevered returns can be determined, with projects with good physical plants providing 18% unlevered returns and projects with major physical plant problems more likely yielding 7% returns. Experience has also shown that garden apartments and mid-rise mixed use projects are the lowest risk construction projects. The venture will avoid any high-rise redevelopment. The sponsor has relationships with quality providers of physical needs assessments. ii. Resident Quality Review- when performing a value added repositioning of an apartment home community, the financial stability of the resident base is a critical, if often overlooked, element. Through use of First American’s Registry property evaluation product, a clear picture of the financial health of the community resident base can be obtained. The review can also determine to the extent the rent roll has been “stuffed” to boost reported occupancy and revenue. To the extent the resident base is stable it can reduce the risk associated with a repositioning. Where the resident base is risky, this information can be used to appropriately price the risk. 4) Proprietary Knowledge The sponsor has developed proprietary knowledge in the following areas: a) The inclusion of using resident quality underwriting in the acquisition process b) The use of quantitative forward looking metrics to improve property performance, including an e-mail based customer surveying system. Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 17
  18. 18. c) The use of decision modeling to assemble the highest revenue maximizing package of physical features and benefits by customer segment d) The use of advanced research methodologies to identify maximum opportunity markets and submarkets for property acquisition, disposition and redevelopment targeting e) The research to understand the drivers of apartment demand by customer segment and the ways to create a superior customer experience that maximizes profitability using revenue and cost drivers f) The leveraging of capital improvements to reduce energy consumption and environmental impact g) The leveraging of vendors to reduce unit turn costs and cycle times, importing directly from China to reduce upgrade costs, partnering on a major portion of facilities maintenance, and partnering with existing vendors many of the off-site property management functions such as media and revenue/pricing management. h) The selection and hiring of site members using behavioral screening to ensure that the team is consistent with the customer experience we will deliver. i) Long time industry participation to enable selection of the appropriate partners, suppliers and prospective joint ventures, along with internal contacts databases with histories. 5) Investor Credibility The sponsor has developed extensive credibility with the investment community by communicating his strategy and delivering on his commitments when a leader of AIMCO. Included were banks, rating agencies, sell side analysts, fund managers, real estate private equity managers, industry analysts, industry Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 18
  19. 19. associations and publications. Since departing AIMCO, the sponsor has also developed contacts through consulting engagements on REIT valuations in the hedge fund and investment management community. This credibility provides the venture with opportunities to meet with other investors to add to the fund size, or develop dedicated accounts for initial investors wanting the benefit of a larger organization. Sanctuary Advisors, an LLC is the sponsoring organization. The fund will be formed as a Limited Partnership. Fund Returns & Expenses The fund will charge an annual asset mgmt fee equal to 1.5% of committed capital, plus promoted returns to the sponsor based on the following schedule: IRR up to 25% -100% to equity investors IRR of 25.0-27.5% -80% to equity investors, 20% to sponsor IRR of 27.5%- 30% -70% to equity investors, 30% to sponsor IRR>30% -60% to equity investors, 40% to sponsor This compensation structure aligns the interests of the investors and the sponsor- we have geared our return schedule assuming no proprietary knowledge with which to generate outsized returns, while we believe that we have such a capability. The flat asset mgmt fee provides a stable income stream to run the sponsor organization, while encouraging transaction activity that is solely in the interest of the fund’s investors. We estimate that the fund must reach a minimum size of $50MM to provide a viable asset mgmt revenue base for the sponsor organization. Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 19
  20. 20. Targeted Markets for Fund Acquisition These markets are under consideration for acquisition and ownership: Boston New York Metro/NJ/Long Island Philadelphia Washington DC Metro South Florida Chicago Denver Los Angeles San Diego San Francisco Seattle Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 20
  21. 21. Value Added Case Study #1 : Broadcast Center, West Los Angeles, CA Broadcast Center 7 Units: 280 Location: Down the block from The Grove (outdoor upscale mall), across from CBS Television studio Property Description: mid-rise 1980’s construction, 20% Low Income Units Scope: Exterior Renovations: Stucco repainted, new clubhouse, new leasing office, new pool deck, renovated hallways Interiors: New kitchens and bathrooms (cabinetry, granite counters, wine cooler, stainless appliances, hardwood flooring). Washer/Dryer not included in scope; handled with fluff/fold service Return on Capital: 12% unlevered Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 21
  22. 22. Broadcast Center 8 Typical Interiors Broadcast Center 9 Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 22
  23. 23. Value Added Case Study #2: The Crescent at West Hollywood The Crescent 10 Units: 130 Location: Sunset Blvd, near Fairfax Property Description: 1980’s construction, near extremely fashion forward neighborhood Exteriors: Stucco repainting, new lobby, clubhouse, fitness center, theatre, resurfaced pool and pool furniture/cabanas Interiors: luxury kitchen and baths (granite counters, stainless appliances, cherry wood cabinets, in-unit washer/dryer combination unit, Kardean flooring, granite fireplace surrounds, wine chiller, 42” Plasma TVs Return on Capital: 12% Unlevered Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 23
  24. 24. The Crescent 11 Projections and Statements Please see our projections, assumptions and statements, beginning on the next page. Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 24
  25. 25. Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 25
  26. 26. Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 26
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  28. 28. Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 28
  29. 29. Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 29
  30. 30. Appendix: The Multifamily Investment Market The following chart below demonstrates the consequences of lax - loan underwriting standards in the CMBS market in the 2005-2007 period, which are now resulting in increased delinquencies. At the same time loans underwritten through the agencies (Fannie Mae and Freddie Mac) are not showing this kind of delinquency increase. The leverage assumptions we are making are consistent with agency underwriting standards (which now account for >90% of all Multi-family loans in 2H08), so that we can take advantage of the forthcoming distress. Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 30
  31. 31. Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 31
  32. 32. U.S. Multi-family Property Vacancy Rates . Demographic Changes in the Numbers of 20-34 year olds/households of 20-34 year olds (actual and anticipated)] 10 8 6 4 2 20-24 0 25-29 %? 1990-95 1995-00 2000-05 2005-10 2010-15 30-34 -2 -4 -6 -8 -10 Source: U.S. Census Bureau and estimates Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 32
  33. 33. Supply of Multifamily Becoming Constrained Reduced availability of finance, rising construction costs and the increasing scarcity of development sites have caused the construction of new multifamily communities to slow. The change in “construction starts” shows that in the last two years construction growth has turned sharply negative for the first time since the early 1990’s. Construction Starts and Originations for Multi-family Properties Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 33
  34. 34. US Monthly Change in Employment (‘000 jobs) Commercial Banking 8.0% 4.0% 42.0% 7.0% CMBS, CDO and other ABS issues 7.0% Life Insurance Companies Savings Institutions 9.0% Government Sponsored 23.0% Agency and GSE Backed Source: REIS Capital Market Briefing Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 34
  35. 35. IRR Expectations by Market Sanctuary Advisors, LLC – Confidential Business Plan [Version 5.0] 22 March 2009 Page 35