Durham

Durham, NC

Download Offering Memorandum

Co-Manager

Vivo Investments, LLC

Asset/Strategy Type

Hotel-to-Apartments Conversion

Minimum Investment

$50,000

Additional

Information

Express Interest

Targeted Hold Period:
24 months

Post-Converted Units:
183 Apartments Units

Fairway America Management Group IV LLC (“Fairway”) and Vivo Investments, LLC (“Vivo”) (Co-Managers) intend to acquire a 183-room, non-operating hotel in Durham, North Carolina and convert it to 183 apartment units.

Investment Summary

Jointly, the Co-Managers have acquired more than 23 projects together as part of this opportunistic strategy to acquire functionally obsolete hotels at attractive all-in cost basis and convert them into competitively-priced studio, one- or two-bedroom apartments. Once the conversion is complete, the Co-Managers intend to refinance or sell the Property. 

  • Well-Located to Meet Renter Demand: The Property is a 7-minute drive from downtown Durham and a 6-minute drive from Duke University. It has direct access to I-85 to commute to Research Triangle Park, the Raleigh-Durham Airport, and the greater Triangle region. There is also walking access via Ellerbee Trail to a 17-acre wooded preserve. 
  • Shortage of Affordable Housing: Population and job growth above the national average continues to create net new demand for housing.1 Despite steady Class A new construction, Durham’s vacancy has remained steady between 5-6%, and market rent growth has continued to outpace inflation and the US overall at 16.8% year over year.2 With rapid growth, supply is expected to trail demand, especially for affordable units. Post-conversion market rents at the Property are priced $536 (35.5%) cheaper than the average market studio and $341 (25.9%) cheaper than renovated comparable studios.3, 4
  • Highly Liquid, Growing Market: Investor appetite for multifamily product in Durham has created competitive market pricing and extraordinary liquidity for sellers in the market. $2.4 billion sold last year alone, with an average price of $215K/unit, 22.3% higher than the projected sale price per unit for this Property.5 Capital markets demand is supported by thousands of new jobs and residents being created in the Triangle each year alongside a fundamental supply shortage of affordable housing.6
*The business strategy is subject to change. There are many risks to participating in this opportunity. See “Risk Factors and Fee Disclosures” in the Offering Memorandum for a discussion of some of these risks, including loss of capital, illiquidity, lack of diversification, and capital call risks. This opportunity is unsuitable for investors who are not prepared to hold their ownership position indefinitely and who cannot afford a complete loss of capital.

 1 ESRI Community Profile, June 2022
2 CoStar Analytics, Durham Multifamily Market Report, June 2022
3 CoStar Market Studio Study, Property Summary Reports, August 2022
4 CoStar Property Summary Reports – The Forest 800 White Pine Dr, SoHo Apartment Homes, Venable Durham, The Ramsey, West Village, 605 West End Gregson, Icon Downtown Durham – June 2022
5 CoStar Analytics, Durham Capital Markets Report, June 2022
6
https://wraltechwire.com/2022/01/04/study-triangle-2nd-in-us-for-growth-from-relocation-that-could-drive-up-home-prices/

Property & Renovation Summary

Address
2517 Guess Rd
City / State
Durham, NC
Year Built
1973
Hotel Rooms (Existing)
183
Average Unit SF (Post Conversion)
250
Rentable SF
45,750
Parking Spaces
196
Weighted Average Underwritten Rent
$975
CapEx/Unit
$43,470
Expected Hold Period
2 years
Total All-In Cost
$23,707,482

FAQ

The information provided in this FAQ is intended only to supplement an investor’s review of the formal Offering Memorandum. All projections, targets, timelines, or business plans described below are preliminary, may not be achieved, and are subject to change. Like all real estate investments, this opportunity is speculative and involves substantial risks including, but not limited to, illiquidity, lack of diversification, complete loss of capital, construction/renovation risk, default risk, and capital call risk. No investment decision should be made based solely on the information in this FAQ. Each prospective investor should review the formal Offering Memorandum, including the Risk Factors and Fee Disclosures, with competent legal, tax, or other advisers.

Will the Property undergo immediate closure and renovations?
Yes, the Co-Managers intend for the Property to be vacated at close and deferred maintenance work to begin immediately.
What deferred maintenance needs to be completed to receive the conversion permitting?
Permitting for conversion work is not contingent upon completion of deferred maintenance. Unit conversion and site work is expected to run in tandem over the 12-month construction period upon receipt of proper municipal approvals.
Who is the target renter and why do we think they will want to live at this Property?
The target renter is anticipated to be a price-conscious single-person household who desires easy access to downtown Durham, Duke Medical, Duke University, and the I-85 highway servicing employers in the larger metro.
Why are we confident we can lease up the Property that is 100% studios?

We believe current studio rents, vacancy rates, and new construction of studios indicates a wide and growing demand for studio units in Durham. Our targeted rents will be at least $341 cheaper per month than renovated studio product in the submarket.7 Please see the Offering Memorandum for more detail.

What are targeted rents after conversion, and how does that compare to the market?

We anticipate charging $975 per month for rent, which is $536 per month cheaper than the average market rate studio and $341 per month cheaper than renovated comparable studios.8,9

Why do we like the Raleigh-Durham MSA?

It checks a lot of the boxes we look for in all our investments: job growth, population growth, economic diversity, strong education centers, and a relatively high quality of life and low cost of living.10, 11, 12 Raleigh-Durham’s Research Triangle Park in particular has garnered national attention as the US economy increasingly shifts to research and innovation jobs in life sciences, technology, and related.13 We believe Google and Apple’s new office announcements in the area bolster investor confidence in the market as a growing talent hub, as shown by $2.4 billion in year-over-year multifamily sales in Durham alone.14, 15, 16

What are the major capital items that the Co-Managers intend to be address?
The major capital items are interior room work (42.6%) and site work (23.5%). Interior rooms will have kitchens added with requisite electrical and plumbing infrastructure, along with new framing, flooring, and finishes. Site work includes roof, boiler, HVAC, exterior lighting, fire/life safety, landscaping, fencing and security, and parking lot repairs among other items. All code compliance issues are budgeted to be addressed, and the Property environmental report recommends no further action. Currently, the budget also includes a 10% contingency factor, or $753K to address cost escalation risk and other risk factors.
Do the Co-Managers need to attain a change in zoning?
No. The Property is zoned as both Commercial General and Office/Industrial per the City of Durham Unified Development Ordinance, both of which allow for multifamily housing by-right without a need for a change of use. The Durham City-County Planning Department (“DCCPD”) and a third-party zoning consultant also confirmed no rezoning is necessary for this project. However, the residential density exceeds requirements, and the Co-Managers expect the site will be adopted as existing non-conforming.
Is there a variance required for parking?
Yes. DCCPD requires further review and approval of a parking variance at the Property. A minimum of two parking spaces per unit are currently required (366), whereas the property contains 185 spaces. Vivo has applied for a parking variance in an effort to avoid constructing the required spaces. Based on plans received from an architect engaged by Vivo, there is space to increase the parking spaces to 196 with restriping the existing pavement. A variance would still be needed to avoid paving additional parking areas. The Co-Managers anticipate the City of Durham will approve or recommend the parking variance site plan prior to closing, but do not anticipate the decision will be made before the deadline for investors to make an investment decision.
Do we get a discount on the purchase price due to the asset being distressed?
We believe we are acquiring the Property at a compelling basis due to the seller’s low basis in the Property and the inoperable nature of the asset under its current use due to mismanagement and deferred maintenance. We believe the purchase price of $10M or $54K/unit allows our all-in projected cost per unit to remain well below replacement cost for a like asset and therefore allows for competitive rental rates.
Why are we comfortable projecting a 5.25% cap rate on exit? Won’t micro studios be less attractive when we go to sale?

Compared to the Durham apartment market cap rate of 4.5%,16 a 5.25% represents both cap rate expansion of 15 basis points per year and 45 basis points of expansion in consideration of the liquidity and investor interest for studio-only properties. We believe this is conservative and reasonable underwriting, especially given the exit price per unit.

What is being done to hedge interest rate risk?
We have selected a lender offering a fixed rate product. The interest rate is anticipated to be 9.5% until achieving certificate of occupancy and 7.0% thereafter, per the Co-Manager’s executed term sheet.
Who is the likely buyer?
We believe the buyer is likely to be a core plus to value-add private buyer, perhaps a 1031 buyer, family office, or private real estate firm. For the targeted exit price around $30M, the deal on its own is likely too small to attract institutional investors. With a 5.25% going in yield and opportunity upon sale to further add value through increased rents, operational efficiencies if the buyer has market scale, and projected economic growth in the Durham region, we believe the buyer pool will be strong at sale.
If market conditions worsen and we can’t exit in month 24 at our targeted sale price, what will we do?
A risk mitigant for this scenario is our ability to potentially refinance the Property. We are assuming we can secure an amortizing, 5.50% fixed rate debt option (potentially a bank or agency) at 65% LTV / 1.4x DSCR at the end of month 24. This would allow the Co-Managers to pay down the senior loan at a cheaper cost of capital and be more flexible in sale timing
7 ESRI Community Profile, June 11, 2022
8 CoStar Property Summary Reports – The Forest 800 White Pine Dr, SoHo Apartment Homes, Venable Durham, The Ramsey, West Village, 605 West End Gregson, Icon Downtown Durham – June 2022
9 CoStar Market Studio Study, Property Summary Reports, August 2022
10 CoStar Property Summary Reports – The Forest 800 White Pine Dr, SoHo Apartment Homes, Venable Durham, The Ramsey, West Village, 605 West End Gregson, Icon Downtown Durham – June 2022
11 ESRI Community Profile, June 2022
12 https://www.payscale.com/cost-of-living-calculator/North-Carolina-Raleigh
13 https://taxfoundation.org/2022-state-business-tax-climate-index/
14 https://www.cbre.com/insights/reports/us-life-sciences-talent-2022
15 https://www.bizjournals.com/triangle/news/2022/08/03/google-keeps-increasing-space-in-durham-no-incent.html#:~:text=Google%20announced%20plans%20for%20its,home%20in%20Durham%20will%20be.
16 https://www.wral.com/apple-picks-triangle-north-carolina-for-new-campus/19646410/
17 CoStar Analytics, Durham Capital Markets Report, June 2022