Fairway Vivo GP Fund LLC
Anticipated Term of Fund:
5 years after initial closing
(3 years plus two annual extensions)
Why Hotel to Apartment Conversions?
- Conversions address immediate housing needs: The fund invests in hotels and motels located in areas throughout the US with a strong demand for workforce housing (intended for 80% to 120% area median income), with a focus on budget and midscale hotels that can be converted in a cost-effective manner due to existing infrastructure, general floor plan, and common area amenities. The Fund’s objective is to acquire hotels and motels in favorable locations and convert them to apartments.
- In the second half of 2021, there was an estimated shortage of 1.6 million housing units nationwide. Additionally, price increases continue to limit homeownership. The homeownership rate sank to 65.4% in Q3 2021, down 2.5% from Q3 2020, further increasing the demand for apartments.1
- Supply/Demand Imbalance: The trailing 12-month average apartment per unit sale price is 13.4% above the historical average. In contrast, trailing average daily rental rates in the hospitality sector are $61/room compared to the pre-pandemic level of $88/room, and trailing 12-month sales pricing for hotels (through October 2021) is $135,000/key vs the historical average of $143,000.1
1 The Linneman Letter –Volume 21, Issue 4
- 100% of Net Income: Fund investors will earn 100% of the net income of the Fund with no profit participation by the Managers at the Fund level (Managers and their affiliates do receive promotes and carried interests at the deal level). Distributions to the fund can be issued to Members as return of capital or may be reinvested in a new or existing investment
- Capitalization Structure: Capital Investment – The fund will form an entity to acquire each asset (an “SPE”) and identify the LP Investors for the SPE (typically providing 80-90% of the equity needed to capitalize); with the Fund providing the other 5-20% as the GP Investor
- Capitalization Structure: Debt and Equity – Each acquisition is expected to be structured with 60-80% bridge/construction debt and 20-40% equity. Upon stabilization after conversion, the Co-Managers expect to refinance the property and obtain debt in the range of 60-75% of stabilized value and distribute any excess proceeds to the SPE’s investors, namely the Fund and the other LP Investors.
2 years from initial closing
(subject to extension)
2% on committed captial annually
Capital Raise Fee:
2.5% on invested equity one-time fee as Fund expense
*Disclaimer: This offering is speculative and involves substantial risks. Consider the risks outlined in the formal offering documents, including the Private Placement Memorandum, before investing. Risks include, but are not limited to illiquidity, lack of diversification, complete loss of capital, default risk, and capital call risk. Investments may not achieve their objective.
Hotel to Apartment Target Asset Description
- Hotels and motels located in areas that have a strong demand for workforce-level housing, with a focus on budget and midscale hotels
- Properties that have floorplans, infrastructure, common area amenities, and other structural and design elements that allow cost-effective conversion of the property to an apartment
- Well-located properties near public transportation and large centers of employment that will be attractive to potential tenants at the projected rental rates for each property
- Properties that can be acquired and converted for total capitalization of approximately $5,000,000 to $30,000,000
- Properties in municipalities likely to approve the zoning and permits needed to complete the planned conversion projects
- Properties located in primary, secondary, and sometimes tertiary metropolitan markets and cities within the U.S.
Leveraging Partner Strengths in the Middle Market and Hotel to Apartment Housing Strategy
Fairway* provides critical services that are outside most sponsors’ area of expertise. These functional areas are Fairway’s core strengths and managing these time-consuming functions will allow Vivo to focus on what they do best.
- Investment Structuring
- Offering Documents
- Capital Market Services
- Investor Relations
- Accounting & Reporting
- Portfolio Oversight
- Administration and Tax
* Includes services provided by Fairway America and its affiliates, including its majority-owned subsidiary, Verivest LLC
Vivo’s expertise in locating, acquiring, and repositioning assets and performing full renovations to reach stabilization will be fundamental to scaling the Fund’s investments and executing its strategy.
- Property Manage
- Execute Strategy
LP Subscription Booklet – Click to Download
Private Placement Memorandum – Click to Download
LLC Agreement – Click to Download
Operations & Controls Procedures – Click to Download
2022 Fairway Disclosure Brochure – Click to Download
Fairway Proxy Voting-Class Action Policy Notice – Click to Download
2022 Fairway master Disclosure Letter – Click to Download
An investment in Fairway Vivo GP Fund LLC (the “Company” or the “Fund”) involves significant risks. It is only appropriate for qualified, sophisticated investors that are able to bear the economic risk of a complete loss of their investment in the Fund. In addition to the general risks of participating in a pooled investment fund, which include illiquidity, lack of diversification, complete loss of capital, default risk, and the risk that the Fund may not achieve its objectives, some of the more significant risks associated with this investment include the below. Defined terms are defined in the Fund’s Private Placement Memorandum, unless otherwise noted. This description of risks is not intended to be comprehensive. Please consider the more extensive description of risks outlined in the Fund’s formal offering documents, including the Private Placement Memorandum, before investing.
Unproven Investment Strategy
The investment strategy described in the Memorandum is unproven and speculative. The Co-Managers have not previously operated or attempted to operate a fund that invests solely in SPEs that invest in hotel properties for conversion to multifamily projects. Although affiliates of the Co-Managers have invested in and raised capital for similar projects, none of those projects has been fully completed. The financial projections and related assumptions upon which the Co-Managers’ target returns for this Fund are based are just that: assumptions. Moreover, while the Co-Managers believe that certain market dynamics make the conversion strategy attractive, other real estate investors are currently liquidating many of the Assets that the Fund intends to pursue, and there can be no guarantee that the Co-Managers’ assessment of current market dynamics is accurate.
Pursuit Costs May Not be Recovered
Members in the Fund bear the risk that certain Pursuit Costs may not be recovered for a variety of reasons, which may result in a loss of capital or reduced financial performance of the Fund. The Fund has the ability to call down Members’ Capital Commitments to pay Pursuit Costs, including before the time Co-Managers have either formed or fully funded an SPE, any LP Investor has been admitted to the SPE, or before the SPE has acquired an Asset. Those Pursuit Costs, which include legal fees, third-party due diligence fees and expenses (such as environmental, property condition, and appraisal reports), closing costs, accounting and administration fees, earnest money deposits, the costs of obtaining third-party architectural drawings and similar plans, costs relating to obtaining permits and zoning approvals, and similar pre-asset acquisition costs reasonably necessary to the pursuit and acquisition of Assets, may be material.
Although Co-Managers anticipate that the Fund will be able to recover most Pursuit Costs from SPEs, Pursuit Costs relating to Assets that are not acquired will not be recovered, and the Co-Managers may agree with an SPE’s LP Investors not to recover certain Pursuit Costs from an SPE, regardless of whether one is formed. Pursuit Costs that are not recovered for any reason will represent a Fund Expense with no return. While the Co-Managers believe that the economic benefits of making investments in a large number of diverse SPEs without being subject to any carried interests or promotes will provide financial benefits that outweigh the risks associated with incurring Pursuit Costs that may not be recoverable, any Pursuit Costs that are not reimbursed will have an adverse effect on the Fund’s financial performance and Member returns, and could result in a loss of invested capital.
Risks in the Hospitality and Multifamily Markets Generally
The hospitality market has recently been severely adversely affected by the COVID-19 pandemic and other market dynamics. The Co-Managers expect that these adverse effects may continue for some time as the impacts of the pandemic play out over time. The Assets the Fund intends to acquire through its Investments in SPEs, therefore, can be considered distressed, and in some cases, severely distressed. Although Co-Managers believe that this distress, and the acquisition opportunities it may create, are part of what makes the Fund’s investment strategy and objective attractive, the Assets may lose value and be difficult to dispose of, particularly if the SPEs are unable for any reason to convert those properties to multifamily properties. Some of the reasons that may not be possible are discussed below and include an inability to obtain permitting and similar approvals, lack of funding, increases in labor and material costs, and many others.
While the multifamily market has not been as adversely impacted by the pandemic as hospitality properties, it has also been impacted in a variety of ways. Among other things, state and local laws and ordinances limiting landlords’ ability to evict tenants and otherwise enforce their obligations to pay rent have been severely curtailed. In some areas and in some properties, this has resulted in lower rental collections and other problems. These and other market dynamics may have an adverse effect over time on the value of multifamily properties like the ones the Fund intends to pursue, manage, and eventually sell through its investments in SPEs. These or other market dynamics that adversely impact the multifamily housing markets, either nationally or in any of the specific markets in which Assets held by an SPE in which the Fund holds an interest, may materially and adversely impact the Fund’s ability to generate a return for its Members and otherwise have a negative impact on the Fund’s financial performance.
Lack of Diversification
Nearly all of the Fund’s capital will be concentrated in a limited asset class (multifamily conversions from hotel and motel properties in areas with demand for work-force level housing). The Co-Managers can give no assurances with respect to any degree of diversification in the Fund’s Investments by geographic region, property class, or other characteristics. If the Fund makes an Investment in an SPE with the intent that the SPE will refinance or sell a portion of the Asset, there is a risk that the SPE will be unable to successfully complete such a financing or sale. This could lead to increased risk as a result of the Fund having an unintended long-term investment and reduced diversification. A lack of diversity, poor performance of the work-force multifamily asset type as a whole, or poor performance of a particular market or individual Asset where an SPE in which the Fund has an investment could significantly affect the total returns achieved by the Fund.
Illiquid and Long-Term Investments
Any investment in the Fund requires a long-term commitment with no certainty of return. There most likely will be little or no near-term cash flow available to the Members. Many of the Assets will be highly illiquid, and there can be no assurance that the Fund will be able to realize returns on such Assets in a timely manner. The Co-Managers anticipate each SPE holding an Asset between two and three years, but it may also take longer than expected for the SPEs to dispose of the Assets they hold. Moreover, while the Fund will act as the general partner or manager of each SPE, it is possible that the Co-Managers will not be able to successfully negotiate with the LP Investors to obtain any control rights for the Fund with respect to the sale or refinance of Assets. Dispositions of Assets also may be subject to contractual limitations on transfer or other restrictions that would interfere with subsequent sales of such Assets or adversely affect the terms that could be obtained upon any disposition thereof. The market prices, if any, for such Assets may be volatile, and an SPE may not be able to sell the Asset it owns when it desires to do so or to realize what the Co-Managers perceive to be their fair value in the event of a sale. The sale of illiquid Assets often requires more time and results in relatively higher selling expenses. In addition, less marketable or illiquid Assets may be more difficult to value due to the unavailability of reliable market data.
The Terms of Each SPE Are Uncertain
Any discussion in the Memorandum of the terms of any SPE or the relative rights or obligations of the Fund, the Co-Managers, and the other LP Investors in each SPE with respect to an Asset is based on the Co-Managers’ assumptions about the Fund’s investment strategy. However, these aspects will be negotiated on an SPE-by-SPE basis with the LP Investors in each SPE and their advisers and representatives. There can be no guarantee that the Fund, or the Co-Managers acting on behalf of the Fund, will be able to obtain any particular terms with respect to an SPE, and the Co-Managers may determine to either proceed with the investment in an SPE and that SPE’s investment in an Asset even though the terms are different than those summarized herein or not as favorable to the Fund as the Co-Managers would otherwise like, or not proceed with the investment in the SPE even though the Asset to be acquired by the SPE would otherwise be an attractive investment opportunity for it and, through its interest in the SPE, the Fund.
SPE Borrowing and Use of Leverage
Each Asset may have significant leverage. Each Asset is expected to be financed with a range of 60-80% bridge/construction debt and 20-40% equity, but the Co-Managers cannot guaranty or make any representation regarding the limitations on use of indebtedness it will successfully negotiate at the SPE level with the LP investors of each SPE. There is no limitation or cap on the amount of indebtedness that any SPE may incur with respect to a specific Asset. Thus, any Asset acquired by an SPE may be heavily leveraged. Although the use of leverage may enhance returns, it also may substantially increase the risk of loss of principal. Such borrowing will increase the exposure of the Fund’s and each SPE’s investments to adverse economic factors such as rising interest rates, severe economic downturns or deteriorations in the condition of the real estate investment or its market. First-position lenders or other holders of senior positions will be entitled to a preferred cash flow before the Fund receives a return on leveraged investments. Leveraged investments are inherently more sensitive to declines in revenues and to increases in expenses. If an Asset cannot generate adequate cash flow to meet the principal and interest payments on its indebtedness, the Fund may suffer a partial or total loss of capital invested in an SPE. In light of these considerations, the Co-Managers will seek to negotiate an agreement with the LP Investors of each SPE that the SPE will not be allowed to borrow more than 80% of the total costs of capitalizing an Asset (including acquisition, construction, rehabilitation and similar costs) or to refinance an Asset for more than 75% of the then-appraised value of that Asset, but these debt limitations may not be sufficient to protect the Fund’s Investments in SPEs that hold leveraged Assets.
Fund Borrowing and Use of Leverage
In addition to debt incurred by an SPE in connection with the acquisition or redevelopment of a specific Asset, which typically will be secured by a first-position security interest in that Asset, the Fund may incur indebtedness to finance its Investments and Fund Expenses and may utilize one or more Warehouse Lines that may be secured by an assignment of the Members’ unfunded Capital Commitments. Any borrowing pursuant to a Warehouse Line will be outstanding for no more than 180 days and will be used to enable the Fund to close transactions, pay Fund Expenses, or provide for interim acquisition financing or refinancing prior to the formation or full funding of an SPE in advance or in lieu of Capital Calls. The Fund may, in exchange for an appropriate, market-based guarantee fee, guarantee certain debt obligations of an SPE when the Co-Managers determine that doing so is in the best interests of the Fund and its Members. The Members may be required to acknowledge to the Fund’s lenders their obligation to pay their share of such indebtedness up to the amount of their unfunded Capital Commitments.
There can be no guarantee that the Fund will be able to obtain a Warehouse Line when needed or on favorable terms for the Fund. Any difficulties in obtaining a Warehouse Line, or the Fund’s inability to repay the Warehouse Line when due, could require the Fund to make a Capital Call to its Members before it would otherwise, or could adversely affect the Fund’s ability to pay its Fund Expenses when due or close the Fund’s Investments in SPEs as intended.
Members may not use their Interests in the Fund as collateral for other indebtedness or otherwise transfer their Interests without the prior consent of the Co-Managers.
Investment in Distressed Assets
The Fund intends to invest in SPEs to facilitate the purchase of distressed hotels and motel throughout the United States with the intent to convert those properties into working-class multifamily properties. By their nature, these investments will involve a high degree of financial risk, and there can be no assurance that the Fund’s and any SPE’s return objectives will be realized or that there will be any returns of capital. Furthermore, investments in properties operating in workout modes or under applicable bankruptcy laws may in certain circumstances be subject to certain additional potential liabilities that may exceed the value of the applicable SPE’s original investment. In addition, under certain circumstances, payments to an SPE and distributions by an SPE to the Fund or by the Fund to its Members may be reclaimed if such payments or distributions are later determined to have been fraudulent conveyances or preferential payments.
Risks Associated With Having More Than One Manager
As described in the Memorandum and provided for in the LLC Agreement, the Fund will be Managed by two Co-Managers, whose rights and obligations with respect to managing the Fund are memorialized in a Co-Management Agreement, which is summarized above and available to prospective investors in the Fund upon request. The Co-Managers also have the ability to assign their rights and obligations with respect to the Fund to one or more entities owned or controlled by them, and those entities may have other owners or managers who have some ability to control or direct the activities of the Fund. If one Co-Manager disagrees with the actions taken by the other Co-Manager with respect to areas of responsibility delegated exclusively to the other Co-Manager, the dissenting Co-Manager will not have the ability to change or control that decision. Major Decisions, or any other decisions not specifically addressed in the Co-Management Agreement, will require the approval of both Co-Managers. The Co-Managers may be unable to agree on any decisions requiring their unanimous consent. As a result, the Fund’s ability to operate efficiently and to make decisions in the best interest of the Members may be compromised by having two Co-Managers. Although Fairway and Vivo have worked together on some similar projects before, they have not previously worked with each other as Co-Managers of a similar fund, and their ability to do so effectively is unproven.
Risks Associated with Using WACC Percentage to Calculate Allocations and Distributions
While Co-Managers believe that using a Weighted Average Capital Contribution, or WACC, calculations to determine each Member’s appropriate allocation of income, depreciation, and losses, and share of distributed cash is a fair way to compensate Members for the risks associated with the fact that they will be making Capital Contributions to the Fund at different points in time, this Fund is the first time that either of the Co-Managers have used the WACC methodology to calculate allocations and distributions. It is also not a methodology commonly used by other closed-ended funds, and there may be issues with using WACC calculations that Co-Managers do not currently foresee. Those issues and others may result in WACC calculations not being the most fair way to make allocations and distributions, and some WACC calculations may not accurately reflect the relative risks to each Member of contributing capital to the Fund at different times.
In order to effectively use WACC calculations to apportion allocations and distributions among Members, different Members may be required to contribute different percentages of their total Capital Commitments. While Co-Managers intend to attempt to equalize the percentage of each Member’s Capital Commitments that each Member contributes to the Fund by the end of the Investment Period, it is likely that some Members will contribute a greater or lower percentage of their respective Capital Commitments over time than other Members. Similarly, using WACC calculations instead of Ownership Interests to calculate each Members’ relative allocations of income, depreciation, and losses, and share of distributions of available cash, will likely result in Members realizing different rates of returns over time, depending on when they make their respective Capital Contributions.
As of the date of the Private Placement Memorandum, FAMG IV is aware of one active lawsuit involving Daniel Norville. The plaintiff, a contractor that performed work on a property, filed an action for breach of contract in Utah District Court in February 2020 against Mr. Norville and the entity that owns the property. Mr. Norville disputes any personal liability and has engaged in settlement discussions with the plaintiff. It is anticipated that the entity that owns the property will have some liability to the plaintiff. While the Co-Managers do not believe any known or unknown issues in Mr. Norville’s background, including the active litigation described above, will result in liability to the Fund or the Co-Managers, or affect the ability of the Co-Managers to execute the Fund’s strategy, there can be no guarantee.
A primary part of the Fund’s investment strategy is to redevelop newly acquired hotel properties, and some portion of any project in which an SPE invests may include a construction component. Properties being converted or constructed will produce reduced or no income. The Fund will be subject to the risk that any conversion or construction project may not be completed on schedule or within budget. Unanticipated problems, including strikes, adverse weather, material shortages, increases in the cost of labor and materials, bankruptcy or insolvency of a contractor or subcontractor, or construction litigation with contractors, adjacent property owners, or service providers, and delays in construction timelines and obtaining governmental zoning approvals, construction permits, and similar government permissions due to COVID-19, could result in increased delays and costs of a project, which may require the Fund and each SPE to invest greater amounts at different stages of construction than originally anticipated in order for the conversion project to be completed. Whether a property when completed will generate income and value appreciation cannot be determined until after completion of the conversion.
Coronavirus and other Pandemic Related Issues
As of the date hereof, there is an outbreak of a novel and highly contagious form of coronavirus (“COVID-19”), which the World Health Organization has declared to constitute a “Public Health Emergency of International Concern.” The outbreak of COVID-19 has resulted in numerous deaths, adversely impacted global commercial activity and contributed to significant volatility in certain equity, debt, derivatives and commodities markets. The global impact of the outbreak is rapidly evolving, and many countries have reacted by instituting (or strongly encouraging) quarantines, prohibitions on travel, the closure of offices, businesses, schools, retail stores, restaurants, hotels, courts and other public venues, and other restrictive measures designed to help slow the spread of COVID-19. Businesses are also implementing similar precautionary measures. Governments are also implementing moratoriums or other restrictions on tenant evictions due to the economic fallout from COVID-19. Such measures, as well as the general uncertainty surrounding the dangers and impact of COVID-19, are creating significant disruption in supply chains and economic activity and are having a particularly adverse impact on transportation, hospitality, tourism, entertainment, and related industries. Moreover, with the continued spread of COVID-19, governments and businesses are likely to take increasingly aggressive measures to help slow its spread and mitigate its damages. For this reason, among others, as COVID-19 continues to spread, the potential impacts, including a global, regional or other economic recession, are uncertain and difficult to assess.
Any public health emergency, including any outbreak of COVID-19, SARS, H1N1/09 flu, avian flu, other coronavirus, Ebola or other existing or new epidemic diseases, or the threat thereof, could have a significant adverse impact on the Fund, its investments in SPEs, and on the Assets held by SPEs. The extent of the impact of any public health emergency on the Fund, the SPEs, and the Assets will depend on many factors, including the duration and scope of such public health emergency, the extent of any related travel advisories and restrictions implemented, the impact of such public health emergency on overall supply and demand, goods and services, investor liquidity, consumer confidence and spending levels, and levels of economic activity, the length, frequency, or magnitude of any moratoriums or other restrictions on tenant evictions applicable to any Asset, the ability of SPEs to obtain zoning and construction approvals relating to the Assets, and the extent of its disruption to important global, regional and local supply chains and economic markets, all of which are highly uncertain and cannot be predicted. The effects of a public health emergency may materially and adversely impact the construction and development of Assets and their performance once stabilized, which could result in significant losses to the SPEs and to the Fund. In addition, the operations of the Co-Managers (or others involved with the Fund’s Assets) may be significantly impacted, or even temporarily or permanently halted, as a result of government quarantine measures, voluntary and precautionary restrictions on travel or meetings and other factors related to a public health emergency, including its potential adverse impact on the health of their key service providers or other personnel.
Conflicts of Interest Generally
Conflicts of interest exist in the structure and operation of the Fund’s business. None of the agreements and arrangements between the Company and the Co-Managers or their affiliates, including those related to compensation, are the result of arm’s-length negotiations. In addition, no assurances can be made that other conflicts of interest do not currently exist or will not arise in the future. Some of the potential conflicts are described in the Memorandum.
Capital Commitments Are Irrevocable
An investor’s Capital Commitment becomes irrevocable once submitted to the Co-Managers (although the investor does not become a Member until the commitment is accepted by the Co-Managers), and a Member may only transfer an Interest in the Fund or withdraw from the Fund upon approval of the Co-Managers, in the Co-Managers’ sole discretion. This means any potential investor must have sufficient liquidity in other investments or accounts (other than an investment in the Fund) to meet the investor’s capital needs. Members may be required to guarantee or pledge their obligations to fund their Capital Commitments to lenders to the Fund.
Past Performance Is Not a Predictor of Future Results of the Fund
Co-Managers’ and their affiliates’ prior real estate investment return performance does not imply or predict (directly or indirectly) any level of future performance of the Fund. The Fund’s performance is dependent on future events and is therefore inherently uncertain. Past performance by Fairway, Vivo, and their respective affiliates cannot be relied on to predict future events due to a variety of factors, including, without limitation, varying degrees of business strategies, different local and economic circumstances, different supply and demand characteristics, varying degrees of capital, availability of bank loans or other borrowing facilities, and varying circumstances pertaining to the real estate market.
No Assurance of Profit or Distributions
There is no assurance that the Fund’s Investments in SPEs or the SPEs’ investments in Assets will be profitable or that any distributions will be made to the Members. Any return on investment to the Members will depend on successful investments being made by the Fund and the SPEs. The marketability and value of any such investment will depend on many factors beyond the control of the Fund and the Co-Managers. The Fund may not have sufficient cash available to make Tax Distributions to the Members. The expenses of the Fund may exceed its income and the Members could lose the entire amount of their capital contributed to the Fund.
Failure to Make Capital Contributions
Any Member who fails to fund a required Capital Contribution pursuant to the terms of the LLC Agreement (a “Default”) may be deemed a “Defaulting Member” by the Co-Managers. With respect to any amount that is in Default (the “Defaulted Amount”), the Co-Managers may increase the Capital Contributions of the non-Defaulting Members (but not in excess of their remaining unfunded Capital Commitments), or admit a substitute Member to assume all or a portion of the balance of the Defaulting Member’s Capital Commitment. The Co-Managers may also take any of the actions described in the LLC Agreement. See “THE OFFERING AND FUND DETAILS – Failure to Make Capital Contributions” in the Private Placement Memorandum for a description of other remedies available to Co-Managers against a Defaulting Member.