👋 Hello, Best Ever Community!

In today’s newsletter, new funds target billions for distressed office assets, we ponder the perks of non-refundable earnest money, and one investor locks up a $52 million Dallas multifamily deal.

Plus, join us on Thursday, February 29 for a free webinar on Priority & Profit: The Power of Preferred Equity hosted by Darin Davis of Club Capital. We’ll discuss the advantages of preferred equity and how it can be a Trojan horse in the capital stack for smarter investment decisions. Register today!

Read on!

_{🗞 NO-FLUFF NEWS}
CRE HEADLINES

😱 Fed ‘Hasn’t Scared Enough People’: Everyone was excited about interest rates falling in 2024. Ash Patel says we’ll likely have to wait a bit longer as the Fed tries to regain control over the narrative.

📈 Inflation, Again?: New inflation data from the Bureau of Labor Statistics showed prices rose 3.1% in January. Consequently, the outlook on interest rates worsened after weeks of optimism, as futures now predict that a cut is more likely in June.

⛈ Climate Change vs. Multifamily: According to a new study approximately 41% of occupied rental units in the U.S. — 18.2 million homes — are at risk because of extreme weather events and climate change.

🧑‍💻 Operators’ Tech Revolution: With a focus on reducing expenses in 2024, multifamily operators are leaning into tech, with centralization, digital twins, and ChatGPT making a difference.

🏢 Office Conversion Hotspots: The number of apartments converted from office space has nearly quadrupled in the last four years. Washington D.C. leads the list of hotspots where they’re happening most.

_{⭐️ TOP STORY}
THE $1 BILLION QUESTION

It’s no secret what’s been happening in office real estate across the country since the pandemic. As the work-from-home movement gained momentum, office values plummeted. Now, with $117 billion in U.S. office debt maturing in 2024 and a 20% vacancy rate (the highest in 40 years), investors with dry powder are preparing to capitalize. The question is, will they be successful?

Journalist Brian Pascus, who researched and wrote about this trend for Commercial Observer, joined the Best Ever Show this week to discuss why billion-dollar funds are popping up left and right to capitalize on the distressed office market.

💰 Raising Billions: Veteran investors Chad Carpenter and Ethan Penner each purchased office real estate during the downturn in the early ’90s and residential after the 2008 recession. Leaning on that experience, they recognize now as the right time to “buy the dip” in the office market. In response, they’ve launched Reven Office REIT, a $1 billion publicly traded real estate investment trust to raise capital for distressed office assets. It’s just the latest in a string of billion-dollar funds that have sprung up in the opening days of 2024.

👀 The Opportunity: Billions in office properties were financed pre-COVID at levels — and under certain assumptions — that are no longer applicable because of the changing remote-work landscape. Because of the resulting reduced office occupancy, the loans backing these distressed assets need fresh capital injections to remain viable. This, according to Penner, is where Reven sees the most opportunity — on the debt side.

🕸️ A Complex Web: With banks reluctant to take back assets (they’re not property managers) and owners hesitant to exit deals completely at huge losses, REITs like Reven can serve as the bridge between the two, providing a capital infusion to keep the loans viable in return for a preferable part of the capital stack. Because of this unique opportunity, Reven’s preference is to lend, but it also plans to buy distressed office debt at deep discounts, opening its investors to all levels of the capital stack.

What It All Means

🧟 Maybe Office Isn’t Dead After All: Large investors turning to distressed office and raising billions in capital indicates that they’re starting to get a greater sense of where office values are going. The wave of loans coming due appears to be the tipping point that will settle the dust, and on the other side of that uncertainty will be a more predictable market, meaning investors can adequately price assets, assess risk, and deploy their dry powder. “So as the uncertainty ends,” Pascus writes, “the price discovery begins.” What follows, according to Carpenter and Penner, is opportunity. Whether or not the billions they raise will be successful remains to be seen.

👉 Listen to the full episode here.

_{✍️ BEST EVER BLOG}
FROM JOE FAIRLESS

Earnest money signifies a buyer's genuine intent to purchase a property. This deposit is a crucial part of the transaction, contributing towards the down payment. However, what sets transactions apart is the nature of this earnest money — whether it's refundable or non-refundable.

💸 What Is the Earnest Money? The earnest money — also referred to as an earnest deposit, escrow deposit, or good faith money — is a deposit made to the seller that represents a buyer’s good faith to buy a property. The earnest money is usually about 1% of the purchase price and goes towards the down payment. For example, if the contract price is $10 million, the earnest deposit will be approximately $100,000. 

💸 Why Offer Non-Refundable Earnest Money? An offer that includes non-refundable earnest money is stronger than an offer that includes refundable earnest money. In fact, in some cases, a lower offer price with non-refundable earnest money is stronger than a higher offer with refundable earnest money. If a buyer is willing to put down non-refundable earnest money, it is an indication that they are extremely confident in the deal and conveys their intention to close. If they don’t close, the seller gets to keep the earnest money. 

💸 When Should You Offer Non-Refundable Earnest Money? In today’s competitive market, you may need to submit an offer with non-refundable earnest money to be awarded an on-market deal or, in some instances, even to be considered for a deal. However, if you plan on submitting an offer with non-refundable earnest money, your confidence level in the deal needs to be extremely high. To have an extremely high level of confidence, you should spend a lot more time on due diligence before submitting an offer. 

👉 View the full article here.

_{🏠 DEAL BREAKDOWN}
$52 MILLION DALLAS MULTIFAMILY DEAL

Brooke Ceballos-Piñero and partners recently closed on this massive 419-unit deal in Dallas. Here's how they did it. 👇

🏢 Property Details: 14 buildings with 419 total units purchased in November 2022 in Dallas at 91% occupancy in a high-demand, low-supply area. 

💸 Finances: The purchase price was $52 million with $8,667,944 in capital raised.

💵 Debt Structure: $31,200,000 loan with 2.9% fixed interest rate, 12 months of interest-only period remaining, $20.4 million of equity.

💼 Business Plan: Make interior renovations including kitchens, bathrooms, paint, lighting, and hardware. Make exterior improvements, as well as amenity enhancements to pool areas, social courts, and fitness center. Add income sources like in-unit laundry hook-ups and parcel lockers, and bring in a new property management team.

🍾 Projected Results: With a five to seven-year hold, they project a 23.9% IRR, 2.85x equity multiple, and 8% preferred return. 

If you have a deal you'd like us to feature, share it with us!

_{💻 CLUB CAPITAL}
FREE WEBINAR

The current debt and equity market has created an investor opportunity that hasn't been available in over 10 years.

With higher interest rates and tighter regulations among lenders, demand for preferred equity financing is rising, creating opportunities for issuers and investors alike. This webinar will dive into the intricacies of preferred equity, and how it gives investors a front-row seat to returns, priority status, and immediate cash flow.

🎓 In this 30-minute webinar, we’ll cover:

• Cash Flow Clarity: Learn the distinction between current pay and deferred pay to optimize your revenue streams.

• Position Priority Decoded: Understand how preferred equity can be a Trojan horse in the capital stack for smarter investment decisions.

• Aligned Sponsorship: Identify the right sponsor that structures the deal with your vision of investment success. 

• Investment Benefits: Discover the advantages of preferred equity, such as immediate cash flow, short-term investment, and capital preservation.

👉 Register here to join us at 2 p.m. EST on Thursday, February 29. 

Can’t make it on February 29? Register anyway, and we’ll send you the replay. 

_{🎓 EXPERT RESOURCES}
FREE DOCUMENT DOWNLOAD

💸 Raising Money for Individual Deals vs. a Fund

When offering investor securities (as opposed to debt securities) to passive investors, you need to determine whether to raise capital for individual deals or to raise money for a fund. Ultimately, the choice depends on your goals, risk tolerance, and track record in the industry, as well as your preference for immediate versus long-term returns.

👉 Download now!

🙏 Thanks for reading!

Let’s keep in touch! If you received this newsletter from another source, feel free to subscribe here. We’re also available on LinkedIn, Instagram, and YouTube.

Have a Best Ever day!

—Joe Fairless