Vivio on 10th Apartments

Indianapolis, IN

Download Offering Memorandum

Co-Manager

Pepper Pike Acquisition Associates, LLC

Asset/Strategy Type

Value-Add Apartments

Minimum Investment

$50,000

Additional

Information

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Targeted Hold Period:
4 years

Post-Converted Units:
232 Apartments Units

Fairway America, LLC (“Fairway”) and Pepper Pike Acquisition Associates, LLC (“Pepper Pike”) (collectively, the “Co-Managers”) intend to acquire Vivio on 10th (the “Property”), a student housing building comprised of 179 units in Indianapolis, Indiana. The Co-Managers intend to convert the Property to market rate housing totaling 232 units. They believe this will create value through forming smaller, more efficient floor plans on four-bed conversions to garner more income per square foot. The Property will be Fairway’s 21st acquisition with Pepper Pike. The Co-Managers own four other assets in the Indianapolis market.

Investment Summary*

  • Unique Conversion Strategy: By converting the four-bedroom units to one- and two-bedroom units, the Co-Managers expect to earn more rent per square foot for market rate apartments than the current student housing layout. A $3.12M construction budget is targeted to complete this conversion and remaining unit refresh, which the Co-Managers believe will generate on average $229/unit more in monthly rent compared to in-place rents, representing an expected 20.4% return on investment.
  • Competitive Rental Pricing: The Co-Managers will market the renovated and converted units to the broader market rather than only to students. This wider marketing strategy is expected to garner increased demand, with rental rates that compare favorably in the Indianapolis market. The average blended rent for competitor properties is $1,541 per month, while the Property’s post-conversion un-trended market rents are targeted to be $1,575.1
  • Market Experience: Pepper Pike’s acquisitions in Indianapolis include 9 on Canal, Riverbend, Crooked Creek, Lake Castleton, A62 Apartments, and Fountain Parc. The Co-Managers believe this experience and scale in the market will aid in generating operating efficiencies and reduce execution risk.
  • Strong Demand in a Great Location:  Renowned investor Peter Linneman ranked Indianapolis a “red hot” market, second only to Salt Lake City.2 The market has rebounded from COVID and is experiencing strong employment growth and only 2.0% unemployment.3 Healthcare and related employers like the Elanco HQ close to the Property are expected to continue to grow. The local economy supported 11.3% year-over-year market rent growth.4 Meanwhile, new construction in 2021 and 2022 is the lowest in annual deliveries since 2012-2013, with vacancy remaining tight at 5.7%.4

*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 CoStar Competitive Set Properties, April 4, 2022
2 The Linneman Letter, Q1 2022
3 https://www.bls.gov/regions/Midwest/in_Indianapolis_msa.html
4 Indianapolis Market Multifamily CoStar Report, April 2022

Property & Renovation Summary

Address
1717 W. 10th St.
City / State
Indianapolis, IN
Year Built
2017
Units
232
Average Unit SF
629 SF
Rentable SF
145,855 SF
Underwritten Market Rent: Unrenovated / Renovated
$1,433 / $1,575
Capex/Unit
$13,427
Expected Hold Period
4 years
Total All-In Cost
$44,868,135

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.

Why are we operating it as student housing the first year?

The peak student leasing season during summer has already been completed, and acquisition is expected to be completed by 9/30. Fully leasing the property to students is expected to allow time for the Co-Managers to secure permits, materials, and labor, and work on leasing and re-branding strategy for the conversion work targeted to begin in July 2023. The interim income is also expected to cover year 1 debt service.

What is current occupancy %?
As of July 2022, current occupancy was 92.1%. We expect a physical occupancy of 96.6% in month 1 of ownership (173 out of 179 pre-conversion units). We have projected an additional 6.2% total economic vacancy factor in year 1, such that year 1 economic occupancy is 93.1%, in line with the trailing 12 months of income as a student housing project (92.1% T12 occupancy).
When will we begin conversion and renovation work?
– We are targeting July 2023 to begin conversion work, which is expected to last four months
– Re-leasing the non-converted units in year 2 is expected to help stabilize occupancy
– Light renovation is targeted occur as leases turn throughout year 3 of the hold
How long is the renovation expected to last and how many units per month do we anticipate renovating?
Conversion of the 53 4-bedroom units is expected to last four months; this equates to around 13 units per month
What is the expected occupancy during construction?
Expected physical occupancy by month during the four months of conversion: 44.1%, 53.9%, 67.2%, 75.9%
How much Capex have we budgeted towards renovations? 
We project spending $3.115M on construction: $1.5M or 49.3% of that budget dedicated to unit conversions ($28,970 per converted unit), $1.1M or 36% to light renovations upon turnover on the remaining units ($8,901 per non-conversion unit), contingency of $245.8K, and a construction management fee of $212.3K.
What improvements are expected to be made during construction/renovation?
– The Co-Managers intend to construct a demising wall in the four-bedroom units, adding requisite plumbing, mechanical, fire/life safety, and electrical infrastructure as needed for the units to function separately. The split/converted units are expected to receive an additional kitchen and in-unit washer/dryer stack. We anticipate installing new counters, adding or replacing appliances with black or stainless steel, installing new painted cabinets, adding a tile backsplash, and selecting modern fixtures.
– Amenities, landscaping, and signage may be lightly retouched after completion of the conversion work.
Why are we converting the four-bedroom units to one- and two-bedroom units?
By converting the four-bedroom units to one- and two-bedroom units, the Co-Managers aim to create value by creating more efficient floor plans and keeping monthly post-conversion rents in-line (if not cheaper) than comparable product. The four-bedroom two bath units service students well, but we believe there is more demand from market renters for one- and two-bedroom units. Increasing the total unit count and rent per square foot is expected to increase the Property’s net operating income.
What rents are targeted post-renovations? (Are we expected to be below comps in the market)?
Post-conversion market rents as of today are targeted at $1,575 on average across the Property ($1,193 for a studio, $1,275 for a one bedroom, $1,720 for a 2 bed 1 bath, and $,1881 for a 2 bed 2 bath). This drafts below the average asking rents at Cosmopolitan on the Canal and Axis ($1,731 and $1,874) and is in line with 9 on Canal rents (another property acquired by the Co-Managers).1 We believe that superior unit finishes, Class A amenities, and a competitive location will all help the Property lease well among its competitive set.
Do we anticipate making cash distributions to investors, or will the income be used for operating expenses?
We currently anticipate little-to-no cash distributions during the entire hold period. About $375K is currently targeted to be distributed in year 1 as we ramp up to unit conversion work in year 2.  After that, net income is budgeted to be retained to help cover operating and lease up costs.
When do we plan to exit and why are we confident in our exit targets?

We plan to exit in month 48 of the hold at a 5.00% exit cap, or $242,553/unit.
– $242,553/unit is expected to be below replacement cost for a Class A apartment asset
– We are also assuming 0.10% of cap rate expansion per year on the going in cap of approximately 4.6%

What is our assumed growth rate of revenue?
Year 1, 2, 3: 8.0%, 4.5%, 3.0%
– This is at or below the CoStar forecast rent growth (8.5%, 4.7%, 3.5%)2
1 CoStar Asking Rent competitive set data by property, accessed April 4, 2022
2 Indianapolis Market Multifamily CoStar Report, April 2022