🥊 Trump vs. the Fed: Who ya got?

👋 Hello, Best Ever Community!

In this week’s newsletter, Trump takes on the Fed, Evan Polaski puts leverage in its place, and one investment group scores a massive distribution warehouse deal. 

This week’s newsletter is brought to you by Viking Capital, a multifamily boutique with nimble investment sourcing, structuring, execution, and asset management capabilities. Learn more about Viking Capital here.

Read on!

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CRE HEADLINES

😯 Demand Defies Expectations: Despite a influx of new apartments, strong demand has helped the U.S. multifamily sector avoid the worst consequences of overbuilding, with some markets achieving nearly equal supply and demand in Q1 2024.

🏭 Amazon Goes Big: Amazon has spent the first part of 2024 leasing huge industrial spaces, signing at least six U.S. leases larger than 1 million square feet, already matching the number of leases of that size it acquired in 2023.

🛠 Conversion Craze: Adaptive reuse projects are on the rise again with 17.6% more apartments converted from outdated buildings in 2023 compared to the year prior.

💰 A Race for Renewals: Apartment operators are focusing on resident renewal strategies, blending technology with personalized touches to improve retention rates and reduce vacancy losses in a competitive market.

📈 A Slow Recovery: CRE sales are gradually recovering despite persistent high interest rates, with a slower decline in transaction volume and an increase in large deals over $50 million.

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TRUMP TAKES ON THE FED

Some of Donald Trump’s advisors are reportedly drafting proposals that would challenge the Federal Reserve’s independence, arguing that the president should be consulted on interest-rate decisions. It’s easy to see why a president would want this (control) and why the Fed would fight for its independence (freedom from said control). But there’s much more at stake in this tug-o-war.

🇺🇸 Born Free: The Fed’s independence is designed to insulate it from short-term political pressures. It controls inflation by manipulating the federal funds rate, which determines the interest rate at which banks lend money, but the committee that makes interest-rate decisions is only partially presidentially appointed, rendering it largely free from political sway.

⚖️ Independence vs. Accountability: Advocates for the Fed’s independence argue that its freedom from political pressure allows it to pursue long-term economic goals and enact policies that advance the public good, even when politically unpopular. Meanwhile, detractors contest that the Fed’s independence creates a lack of accountability, rendering its governance undemocratic. They also argue that members are not elected officials and, thus, shouldn’t have the power to dictate economic policy. Bringing the Fed under the president’s control would change that.

⚠️ One Danger? Higher Inflation: Economists have said that handing the Fed's policy decisions over to a president would likely lead to higher inflation. A Fed that answers to the president would be more inclined to maintain low interest rates to stimulate short-term economic growth — something every president wants during their term — particularly during election cycles. This could lead to unchecked inflation and long-term economic repercussions, as witnessed in the 1970s when President Richard Nixon pressured the Fed to keep rates low.

WHAT IT ALL MEANS

Ultimately, any changes to the Fed's structure would require Congressional action, which seems unlikely. But should Trump be elected to a second term, it looks like his team is up for that fight, however unlikely they are to win.

📣 “If it becomes clear that there’s going to be a Fed chair that answers to the president, I would expect a dramatic reaction in the markets and the White House would have to deal with that,” said Ian Katz, director at research consultancy Capital Alpha Partners. “There are plenty of people in the markets who would like to see Trump be president again. I don’t think there are plenty of people in the markets who would like to see Trump be de facto Fed chair.”

_{💻 VIKING CAPITAL}
VILLAS AT SUNDANCE

Viking Capital presents Villas at Sundance, a 252-unit, first-generation multifamily asset built in 2012. This asset is located in New Braunfels, TX, in the Texas Innovation Corridor along Interstate 35 between Austin and San Antonio. New Braunfels is the “Third-Fastest Growing City in the Country,” with a population growth of nearly 40% in five years. The city’s growth is driven by new major employers, entertainment centers, and tourism. 

This deal benefits from robust tenant demand due to population growth and a low-cost basis. With minimal new supply expected, Viking Capital secured this asset at a substantial discount, positioning this property as an exceptional investment opportunity. 

Discover more about Villas at Sundance here.

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FROM EVAN POLASKI

So, you want to buy a property. Or you want to invest in a syndication. Either way, you are investing equity, which will be combined with a mortgage to acquire the asset. And, of course, every real estate deal is bought with a mortgage, aka leverage, so that is the right path, right?

Like most things in life, the answer is a solid, "It depends." Taking on mortgage debt can generally fall into two categories: positive leverage and negative leverage. And which your investment falls into all comes down to the numbers. Effectively:

➕ Positive leverage is when the current yield on the asset is HIGHER than the interest rate of the mortgage (or if there are multiple loans and/or preferred equity in the deal, the combined interest rate).

➖ Negative leverage is when the current yield on the asset is LOWER than the interest rate of the mortgage.

🤔 The easiest way to determine if you are investing in a deal with positive leverage or negative leverage is to compare the in-place cap rate to the interest rate. If you are assessing a new acquisition with an in-place cap rate of 5%, and the mortgage carries a 5.5% interest rate, you are investing in a negative leverage deal. Alternatively, if you invest in a deal with an in-place cap rate of 6% and the mortgage carries a 5.5% interest rate, you are investing in a positive leverage deal.

📈 There are several reasons why someone would invest in a negative leverage deal. The most prevalent is that the buyer will execute a value-add business plan and increase the in-place yield (cap rate) over time.

💸 But won’t negative leverage mean you're losing money? Yes and no. Even with negative leverage, you can still be cash flow positive. However, the returns are actually lower in the short term due to this negative leverage.

👉 Discover more here.

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HERITAGE’S MASSIVE DISTRIBUTION WAREHOUSE DEAL

Irwin Boris and Heritage Capital Group scored big on this HUGE distribution warehouse in Indiana. Here's what they're doing. 👇

🏢 Property Details: In June 2023, Heritage Capital Group completed a significant real estate deal in Seymour, IN, located an hour south of Indianapolis. The property, situated in a major growth corridor known for accommodating single-tenant properties exceeding 500,000 square feet, consists of a 763,600-square-foot single-tenant industrial building. The facility serves as a distribution center for an institutional pet supply brand.

Heritage acquired the property through a 1031 exchange, utilizing funds from a property sold in March. The surrounding area boasts a strong tenant mix, with neighboring properties occupied by investment-grade tenants such as Nippon Steel and Common Engines.

💸 Finances: The purchase price was $31.5 million with $12.4 million in equity raised.

💵 Debt Structure: Heritage secured a $20 million loan for the property at a fixed interest rate of 6.1%. The loan agreement includes a no-cost option to refinance after six years. The loan structure consists of a 24-month interest-only period, followed by a 30-year amortization schedule.

💼 Business Plan: The current tenant has six years remaining on their lease and is expected to renew. The team plans to hold the property and refinance with the current lender at no cost after six years. Upon lease expiration or renewal, the projected rent increase is 35%.

🍾 Projected Results: Heritage’s investment projections for limited partners include an internal rate of return (IRR) exceeding 15% and an equity multiple of 1.5x. The average cash-on-cash (CoC) return is projected to be 5% for the first five years, followed by 9% or higher annually thereafter. The investment strategy involves a hold period of 10 years or more.

This is a stable deal with steady cash flow and an expected rent pop at 5+ years. The investment strategy is to hold long term for cash flow with some upside when the current lease expires.

Learn more about Heritage’s next industrial opportunity here. 

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

_{🎓 EXPERT RESOURCES}
FREE DOCUMENT DOWNLOAD

8-Step Process for Finding the Owner of an LLC

When you begin to build your database of apartments, you’re going to come across apartments that are owned by LLCs. If that is the case, who are you supposed to contact? This document outlines the process for locating the name and address of the individual or individuals who own the LLC.

👉 Download now!

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Hope you have a Best Ever rest of your week!

—Joe Fairless