👉Take a look at this article written about our last highly successful project in downtown St. Petersburg:
https://www.prnewswire.com/news-releases/bestselling-real-estate-author-bryan-chavis-proves-his-book-is-more-than-just-a-title-providing-62-returns-in-3-years-during-a-global-pandemic-301522750.html

 

 

🔍Inside look at breaking down a 13 unit multifamily project.

👉Property Overview:

• Property Type: 13-unit, two-story concrete block apartment building.
• Location: Downtown Saint Petersburg, a highly desirable area with close proximity to essential amenities.
• 💵 Rent Status: Current rents are below market, presenting an opportunity to increase rents.
• Potential: Ability to raise rents to market rates through a combination of operational improvements and renovations.
• ⚠️Risk Profile: Significant downside protection due to low leverage financing and the core market location.
• Projected Returns: Expecting 4%+ cash-on-cash returns in a core market with conservative rent growth assumptions.

Offer Summary:

• Price: $2,340,000
• Price Per Unit: $180,000
• Price Per SF: $330.74
• Total Units: 13
• Rentable Building Size: 7,075 SF
• Lot Size: 0.245 Acres
• Year Built: 1948 (Fully renovated in 2017)

🏆Investment Highlights:

• 📌Renovations: Fully renovated in 2017, including mechanical and exterior upgrades.
• Unit Mix: Studios (46%), 1 Bed/1 Bath (38%), 2 Bed/2 Bath (15%).
• 📌Operational Efficiency: Potential for rental upside from comparable properties, additional revenue streams, and expense reductions.
• 📌Zoning: Current zoning permits hotel use, opening income potential for short-term rentals.
• On-Site Amenities: Laundry and storage facilities available, providing additional income streams.
• 📌Upgrades: Interiors have been upgraded with stainless steel appliances, modern fixtures, and other high-quality materials.
• 📌Location: Situated in an urban core, walkable to high-end restaurants, retail, and major employers.
• 📌Nearby Development: Significant nearby developments, including new townhomes selling for $760k+ per unit.
• 📌Proximity: Close to major employers and institutions like St. Anthony’s Hospital, Bayfront Health Hospital, Tropicana Field, and the University of South Florida.

📊Property Details:

• Name: Prince Gregor
• Property Type: Multifamily
• Address: 844 5th Ave S, St. Petersburg, FL 33701
• County: Pinellas
• Nearest Airport: St. Pete-Clearwater International Airport
• Nearest Interstate: I-275
• Flood Zone: X – Minimal Flood Hazard
• Zoning: Employment Center – 2 (EC-2)

Building Information:

• Number of Units: 13
• Number of Floors: 2
• Construction Type: Concrete Block
• Roof: Flat (Replaced in 2017)
• HVAC: Mini Split; Central
• Lot Size: 0.245 Acres
• Building Size: 7,090 SF
• Parcel: 19-31-17-83160-000-0070
• Year Built: 1948
• Year Renovated: 2017

🚙 🚰🧺 Parking, Utilities & Amenities:

• 📌Parking: Gated Surface Parking
• 🎯Utilities: Electric, Water, Sewer, Trash, Cable & Wi-Fi included in rent
• 📌Amenities: On-Site Laundry, Key FOB Building Entry, Storage Units

 

👉Terms / Structure:

• Total Project Equity: $1.18M
• Acquisition Fee: 1%
• Property Management Fee: 5%
• Disposition Fee: 1%
• Distributions: 5% Preferred Return with a 70/30 split of cash flow, and a 70/30 split upon a capital event.

🏢Unit Mix Summary:

• Unit Types and Sizes:
  • Studios: 325-400 Sq. Ft., Rents from $1,135 – $1,275
  • 1 Bed / 1 Bath: 500-550 Sq. Ft., Rents from $1,345 – $1,595
  • 2 Bed / 2 Bath: 1040-1100 Sq. Ft., Rents from $1,695 – $1,895
• Current Monthly Gross Potential Rent: $18,535
• Pro Forma Monthly Gross Potential Rent (Long Term Rentals): $20,400
• Pro Forma Monthly Gross Potential Rent (Short Term Rentals): $1,805 per night
• Current Annual Gross Potential Rent: $222,420
• Pro Forma Annual Gross Potential Rent (Long Term Rentals): $244,800
• Pro Forma Annual Gross Potential Rent (Short Term Rentals): $658,825

Income & Expense Summary:

• Takeover Income & Expense:
  • Gross Potential Rent (GPR): $222,420
  • Other Income: $7,613
  • Effective Gross Income (EGI): $216,152
  • Expenses: $110,637
  • Net Operating Income (NOI): $105,515
• Pro Forma (Long Term Rentals):
  • Gross Potential Rent (GPR): $244,800
  • Effective Gross Income (EGI): $266,477
  • Expenses: $113,153
  • Net Operating Income (NOI): $153,324
• Pro Forma (Short Term Rentals):
  • Gross Potential Rent (GPR): $658,825
  • Effective Gross Income (EGI): $395,295
  • Expenses: $177,588
  • Net Operating Income (NOI): $217,707

Pricing Summary:

• Price: $2,340,000
• Price Per Unit: $180,000
• Price Per Sq Foot: $330.74
• Net Operating Income (Takeover): $105,515
• Net Operating Income (Pro Forma – Long Term Rentals): $153,324
• Net Operating Income (Pro Forma – Short Term Rentals): $217,707
• Cap Rate (Takeover): 4.51%
• Cap Rate (Pro Forma – Long Term Rentals): 6.55%
• Cap Rate (Pro Forma – Short Term Rentals): 9.30%

Investment Plan Financial Overview:

• Purchase Price: $2.34M (Price per unit: $180,800)
• Equity Required: $1.18M (50% Loan-to-Value)
• Financing: Long-term fixed-rate agency financing at 6.5%
• Investor Return Projections (5-Year Hold):
  • Cash on Cash Return: 4.75%
  • Investor Multiple: 2.02x
  • Investor Net IRR: 16.30%
• Preferred Return: 5.00%
• Excess Cash Flow Split: 70% to Investor / 30% to Sponsor
• Capital Event Split: 70% to Investor / 30% to Sponsor
• Exit Sale Price: $3,911,461

🔑Key Points for Presentation and Investor Questions:

1. ❓Why are cash flows low?
   • Current rents are below market, providing an opportunity for substantial rental growth as the units are repositioned to market rates. The current low cash flows are a reflection of this value-add opportunity.
2. ❓Why are we seeking a 50% LTV?
   • The 50% Loan-to-Value ratio ensures conservative leverage, offering downside protection and improving the financial stability of the investment during market fluctuations.
3. 🎯Exit Strategy and Value Creation:
   • The exit strategy is focused on repositioning the property to achieve higher market rents, exploring short-term rental opportunities to maximize income, and eventually selling at a higher cap rate after a 5-year hold, capitalizing on the property’s appreciation.

🎯Executive Summary

The Prince Gregor Apartments represent a prime investment opportunity in the heart of downtown St. Petersburg, Florida. With a purchase price of $2.34 million and a conservative 50% Loan-to-Value (LTV) ratio, this 13-unit, fully renovated property is poised to capitalize on the transformative $6.5 billion Historic Gas Plant District redevelopment. This massive mixed-use project, anchored by a new 30,000-seat stadium for the Tampa Bay Rays, will bring unprecedented economic growth, population influx, and commercial activity to the area over the next few years.

Beyond its prime location, the Prince Gregor Apartments offer significant value-add potential through strategic operational improvements. Chavis Capital will leverage its expertise in property management and asset management to implement robust systems that maximize operational efficiency, reduce expenses, and optimize rental income. With the property already fully rehabbed to modern standards, Chavis Capital’s focus will be on driving operational excellence, ensuring that every aspect of the property’s management contributes to its financial performance and tenant satisfaction.

As the neighborhood evolves into a vibrant urban center, the Prince Gregor Apartments stand to benefit from rising property values and enhanced tenant demand. The strategic use of conservative leverage ensures financial stability while positioning the property for long-term capital appreciation and robust cash flow, making it an exceptional addition to any investment portfolio.

Investment Overview

The Prince Gregor Apartments is a fully renovated, 13-unit multifamily property located in the heart of downtown St. Petersburg, Florida. This property presents an exceptional opportunity to capitalize on one of the most desirable markets in the region. With its strategic location near major employers, high-end restaurants, and retail, the property offers both stability and growth potential.

The property has been meticulously upgraded in 2017, including new mechanical systems, modern interiors, and enhanced amenities such as gated parking and on-site laundry facilities. The current rents are significantly below market, providing a clear path to value creation through rent increases and operational efficiencies.

Value-Add Strategy

1. Rent Increases:
   • Current Situation: Rents are below market, averaging $1,426 per unit.
   • Pro Forma: Through targeted renovations and improved management, rents can be increased to an average of $1,569 per unit, representing a significant increase in revenue.
2. Short-Term Rentals:
   • Opportunity: The property’s zoning permits hotel use, making it ideal for conversion to short-term rentals (STR). STR income potential could reach up to $658,825 annually, substantially higher than traditional long-term rentals.
3. Operational Efficiencies:
   • Management: Implementing more efficient property management will reduce expenses, further increasing NOI.
4. Exit Strategy:
   • Hold Period: 5 years with a projected sale price of $3.91M, capitalizing on market appreciation and improved NOI.

Financial Performance

Takeover Income & Expense:

• NOI: $105,515
• Cap Rate: 4.51%

Pro Forma (Long Term Rentals):

• NOI: $153,324
• Cap Rate: 6.55%

Pro Forma (Short Term Rentals):

• NOI: $217,707
• Cap Rate: 9.30%

Investor Projections:

• Cash on Cash Return: 4.75%
• Investor Multiple: 2.02x
• Net IRR: 16.30%

🎯 Impact of the $6.5 Billion Redevelopment on Prince Gregor Apartments

Project Overview:

• Project Name: Historic Gas Plant District Redevelopment
• Location: Downtown St. Petersburg, FL
• Total Investment: Over $6.5 billion
• Timeline: 20 years, with major developments occurring in the next few years
• Scope: Nearly 8 million square feet of mixed-use development, including a new 30,000-seat stadium for the Tampa Bay Rays.

🔑Key Components and Their Impact on Prince Gregor Apartments:

1. New 30,000-Seat Stadium for the Tampa Bay Rays:
   • Immediate Draw: The construction of a world-class, enclosed stadium will attract significant foot traffic, tourism, and media attention to downtown St. Petersburg.
   • Proximity Advantage: Prince Gregor Apartments, located nearby, will experience increased demand from both short-term visitors and long-term residents wanting to be close to the action, positively impacting occupancy rates and rental income.
2. Residential Development and Population Growth:
   • Housing Boom: The project includes the construction of 5,400 new residential units, adding thousands of new residents to the area over the next few years.
   • Demand Surge: As the neighborhood becomes increasingly desirable, the demand for existing rental units like those at Prince Gregor will rise sharply, driving up rental rates and reducing vacancy.
   • Increased Tenant Pool: The influx of new residents will include professionals, families, and retirees seeking quality housing, ensuring a consistent and diverse tenant pool.
3. Commercial and Retail Space Development:
   • Economic Revitalization: The addition of 1.4 million square feet of Class A office and medical space, alongside 750,000 square feet of retail, will bring a significant number of jobs and services to the area.
   • Rising Rents: The presence of high-paying jobs and new retail outlets will increase the disposable income of local residents, allowing landlords to command higher rents. Prince Gregor Apartments will directly benefit from this economic uplift.
   • Enhanced Amenities: The development will also include a grocery store, entertainment venues, and civic spaces, further enhancing the living experience for tenants and making the area more attractive to potential renters.
4. Hotel and Hospitality Sector Expansion:
   • Tourism Magnet: The 750-key hotel and other hospitality developments will attract both business and leisure travelers to the area.
   • Short-Term Rental Opportunity: The EC-2 zoning of Prince Gregor Apartments permits hotel use, providing the option to capitalize on the booming short-term rental market driven by increased tourism.
   • Increased Property Value: The rise in local tourism and business travel will increase demand for nearby accommodations, making Prince Gregor Apartments an even more valuable asset.
5. Community and Public Amenities:
   • Improved Quality of Life: The project will introduce new community spaces, such as a daycare, library, and open green spaces, improving the overall quality of life in the neighborhood.
   • Tenant Retention: These amenities will make the area more livable and attractive, helping to retain tenants long-term and reduce turnover at Prince Gregor Apartments.

Phased Development and Timely Impact:

• Phase A (Immediate Impact):
  • Stadium Construction & Initial Developments: The first phase includes the stadium, 600,000 square feet of office space, and 300,000 square feet of retail. As these developments near completion, the area will see a sharp rise in economic activity, leading to immediate increases in property values and rents.
• Phase B (Short-Term Impact):
  • Residential and Office Expansion: With 500 new residential units and 200,000 square feet of office space, this phase will further boost the local population and job market, driving rental demand at Prince Gregor Apartments.
• Phase C & D (Long-Term Impact):
  • Comprehensive Development: The completion of 3,000 additional residential units, along with more office and retail space, will solidify downtown St. Petersburg as a major urban center. By this stage, property values are expected to have increased substantially, reflecting the area’s enhanced desirability and economic stability.

Conclusion: The $6.5 billion redevelopment of the Historic Gas Plant District is a transformative project that will dramatically increase the value of Prince Gregor Apartments over the next few years. With significant developments happening in phases, the property stands to benefit from rising rents, increased occupancy, and higher property values. As the neighborhood evolves into a vibrant, mixed-use urban center, the strategic location and zoning flexibility of Prince Gregor Apartments will make it a highly lucrative investment, offering both short-term returns and long-term capital appreciation.

❓QUESTIONS

What’s the correlation between? * Cap Rate (Takeover): 4.51% * Cap Rate (Pro Forma – Long Term Rentals): 6.55% I guess what I’m asking is can you provide a detailed breakdown of why the takeover cap is 4.51% and the exit cap for this project would be 6.55% I thought the lower the cap rate the higher the value of the asset why would the asset Rents be higher, considering the pro forma rents the increase in rents should provide for a higher value please explain

[A]

Your question addresses a crucial aspect of real estate investment analysis: understanding the relationship between cap rates, property values, and rental income.

Understanding Cap Rate and Property Value

The capitalization rate (cap rate) is a key metric in real estate that helps assess the return on investment. It’s calculated as:

Cap Rate

=

Net Operating Income (NOI)

Property Value

Cap Rate=Property ValueNet Operating Income (NOI)

Breakdown of Cap Rates in This Scenario

1. Takeover Cap Rate (4.51%):
   • NOI (Takeover): $105,515
   • Property Value (Takeover): $2,340,000

The takeover cap rate of 4.51% reflects the property’s current income-generating ability based on the existing NOI and the purchase price. This lower cap rate indicates that the property, under its current income structure, is valued more highly relative to its income, often because of its location, condition, or other non-income factors that make it attractive even with lower current returns.

1. Pro Forma Cap Rate (6.55%):
   • NOI (Pro Forma – Long Term Rentals): $153,324
   • Property Value (Projected): $2,340,000 (assuming the same purchase price for the sake of the cap rate comparisonCap Rate=2,340,000153,324 ≈6.55%
2. The pro forma cap rate of 6.55% reflects the expected performance of the property after increasing rents to market levels and optimizing operations. This cap rate is based on the projected NOI after the value-add strategy has been implemented.

Why Is the Cap Rate Higher in the Pro Forma?

You’re correct that typically, a lower cap rate implies a higher property value. However, the increase in the cap rate from 4.51% to 6.55% in this context does not imply a decrease in property value, but rather a change in the relationship between the NOI and the value.

Here’s why:

• Value-Add Potential: The property currently has underperforming rents (below market), which means that the initial cap rate is lower because the income is low relative to the purchase price. This lower cap rate reflects the perceived value of the property, taking into account its potential rather than just its current performance.
• Increased NOI: The value-add strategy aims to increase NOI by raising rents and improving operations. As NOI increases, if the market doesn’t perceive an equivalent rise in property value (which could happen if the market cap rates remain constant or rise slightly due to broader economic conditions), the cap rate will naturally increase.
• Market Perception: The pro forma cap rate of 6.55% suggests that post-renovation and rent increases, the property will generate higher income relative to its initial purchase price. However, the exit cap rate is contingent on market conditions at the time of sale. If market cap rates have increased (possibly due to rising interest rates or other economic factors), the property value might not increase as dramatically as the NOI, leading to a higher cap rate.

To Summarize:

• Takeover Cap Rate (4.51%) is based on the current, lower NOI and reflects the market’s valuation of the property in its current underperforming state. The value is driven by the property’s potential rather than its current income.

• Pro Forma Cap Rate (6.55%) is based on the projected, higher NOI after implementing the value-add strategy. This reflects the property’s performance post-improvement, where the income has increased substantially. The higher cap rate can indicate that the property has reached a more stabilized, income-producing state, and future buyers may evaluate it more on current income rather than potential.

The key takeaway is that the increase in the cap rate reflects the transition from an underperforming asset to one that has realized its income potential. While the lower initial cap rate reflects the property’s potential and desirability, the higher pro forma cap rate reflects its improved income generation, which balances out the property’s increased value with higher operating efficiency.

[Q]  Why Are We Seeking a 50% LTV?

Here’s a more detailed breakdown on why seeking a 50% Loan-to-Value (LTV) ratio is a strategic choice for this investment:

Why Are We Seeking a 50% LTV?

1. Conservative Leverage for Risk Mitigation:
   • Lower Debt Burden: By maintaining a 50% LTV, the property is only leveraged to half of its value, which significantly reduces the debt burden. This means that the property’s income can comfortably cover debt service, even if there are fluctuations in rental income or unexpected expenses. In essence, the property is less vulnerable to financial distress, which is particularly important in times of economic uncertainty.
   • Downside Protection: In the event of a market downturn or a decrease in property values, a lower LTV provides a cushion against potential losses. With only 50% of the property’s value tied up in debt, there is a greater buffer before the property’s value drops below the outstanding loan balance. This reduces the risk of the investment becoming underwater, where the loan balance exceeds the property value.
2. Improved Cash Flow Stability:
   • Lower Interest Payments: A 50% LTV means that the total loan amount is lower, leading to smaller monthly mortgage payments. This leaves more of the property’s cash flow available for distributions to investors or reinvestment into the property. By reducing the debt service requirements, the investment generates more stable and predictable cash flows.
   • Flexibility in Management: With less debt to service, there’s more flexibility in managing the property. For example, if the property requires unexpected capital expenditures or if there are periods of lower occupancy, the reduced debt burden means that these can be handled without jeopardizing the financial stability of the investment.
3. Enhancing Investor Confidence:
   • Attractive to Investors: A conservative LTV ratio of 50% signals to potential investors that the project is being managed prudently. It demonstrates a commitment to preserving capital and reducing risk, which can be particularly appealing to more risk-averse investors who prioritize long-term stability over aggressive growth.
   • Higher Equity Returns: Although the debt is lower, the equity invested in the project has the potential to yield higher returns, especially in an appreciating market. The reduced leverage means that while the potential upside is slightly less than with higher leverage, the risk-adjusted returns are more attractive because the investment is more stable.
4. Preparedness for Market Fluctuations:
   • Interest Rate Volatility: In an environment where interest rates are rising or volatile, a lower LTV reduces exposure to these risks. With less debt, there is less sensitivity to changes in interest rates, which helps maintain the investment’s profitability even when borrowing costs increase.
   • Market Downturns: If the real estate market experiences a downturn, properties with higher LTVs are more at risk of defaulting on their loans due to decreased income or property value. With a 50% LTV, the investment is better positioned to withstand such market challenges, preserving both the property and the investors’ capital.
5. Positioning for Future Opportunities:
   • Equity Building: A lower LTV allows the property to build equity more quickly. As the property’s value increases (especially with the expected appreciation due to the $6.5 billion redevelopment project), the equity portion of the investment grows faster. This opens up opportunities for refinancing or taking on additional projects in the future.
   • Leveraging Future Financing: With a strong equity position, the property may have more favorable terms for any future financing needs, whether for property improvements or other investments. This strategic positioning allows the investment to capitalize on future opportunities without taking on excessive risk.

Summary

In conclusion, seeking a 50% LTV ratio for this investment is a strategic decision designed to maximize stability and minimize risk. By opting for conservative leverage, the investment is protected against market downturns, interest rate volatility, and unexpected financial challenges, all while ensuring stable cash flow and preserving the property’s long-term value. This approach not only enhances investor confidence but also positions the property for sustained growth and potential future opportunities.

[A]

Understanding Zoning: Employment Center-2 (EC-2)

Zoning classifications are crucial for understanding what types of developments and uses are permitted on a given property. The Employment Center-2 (EC-2) zoning designation in St. Petersburg, FL, generally pertains to areas intended to support a mix of business, commercial, and some residential uses, often designed to accommodate employment-generating activities.

What Does EC-2 Zoning Typically Mean?

1. Primary Use:
   • The EC-2 zoning typically allows for various employment-centric uses, such as office buildings, business parks, and light industrial uses. It supports commercial activities that contribute to job creation within the city.
2. Mixed-Use Potential:
   • EC-2 zoning often supports a mix of commercial and residential uses, meaning that a property can be developed for both housing (like apartments or condos) and commercial enterprises (such as retail or office spaces). This makes it versatile for investors looking to attract different types of tenants.
3. Flexibility for Development:
   • The EC-2 zoning classification is more flexible than strictly residential zoning, as it allows for a broader range of activities. For example, a property under EC-2 zoning can potentially host a combination of residential units and commercial businesses. This flexibility is valuable for maximizing rental income and property utilization.
4. Short-Term Rentals (STR):
   • As noted in the property details, the current EC-2 zoning permits hotel use. This is particularly advantageous for properties that can be converted into short-term rentals (like Airbnb), allowing investors to explore high-income opportunities beyond traditional long-term leases.

When discussing the EC-2 zoning with potential investors, you can explain it as follows:

1. Versatility and Potential:
   • “The property is zoned under Employment Center-2 (EC-2), which is one of the more versatile zoning designations in St. Petersburg. This zoning allows for a mix of residential, commercial, and light industrial uses, giving us significant flexibility in how we can utilize the property.”
2. Income Opportunities:
   • “With EC-2 zoning, we are not limited to just residential rentals. We can explore additional revenue streams through commercial tenants or even short-term rentals, given that the zoning permits hotel use. This flexibility means that we can tailor our strategy to maximize returns based on market demand.”
3. Development and Expansion Potential:
   • “The EC-2 zoning opens up possibilities for future development or expansion, should we choose to explore that route. Whether it’s adding more commercial space or expanding residential units, the zoning supports various options that can enhance the property’s value.”
4. Strategic Location:
   • “The property’s EC-2 zoning is particularly beneficial given its prime location near major employment hubs and commercial areas. This not only supports high occupancy rates but also ensures that the property is well-positioned to attract a diverse range of tenants, both residential and commercial.”

By framing the EC-2 zoning in this way, you can highlight the flexibility, potential for income diversification, and strategic advantages it offers, making the property more attractive to investors looking for both stability and growth opportunities.

 

💰📊 Distribution Structure Breakdown

1. Preferred Return: 5%

• What It Means:
  • Investors are given a preferred return of 5% on their invested capital before any profits are split between the investors and the sponsor (Chavis Capital). This preferred return acts as a form of income prioritization, ensuring that investors receive a baseline return on their investment before any additional profits are distributed.
• Example:
  • If an investor contributes $100,000, they are entitled to a 5% preferred return annually. This means the investor will receive $5,000 per year before any additional profits are split.

2. Cash Flow Split: 70/30

• What It Means:
  • After the preferred return has been distributed, any remaining cash flow generated by the property is split between the investors and Chavis Capital. In this case, 70% of the remaining cash flow goes to the investors, while 30% goes to Chavis Capital.
• Example:
  • Let’s say, after distributing the 5% preferred return to all investors, there is an additional $100,000 in cash flow. This amount would then be split 70/30, meaning $70,000 would go to the investors and $30,000 would go to Chavis Capital. If an investor has a 10% share of the total investment, they would receive $7,000 of the remaining cash flow.

3. Capital Event Split: 70/30

• What It Means:
  • Upon a capital event, such as the sale or refinancing of the property, the net proceeds are first used to return the initial invested capital to the investors. After the return of capital, any remaining profits are split 70% to the investors and 30% to Chavis Capital.
• Example:
  • Suppose the property is sold after 5 years for a net profit of $1,000,000 after returning the initial capital to investors. This $1,000,000 would be split, with $700,000 going to the investors and $300,000 going to Chavis Capital. Again, if an investor holds a 10% share, they would receive $70,000 from this capital event.

Summary of Investor Returns Over Time

Yearly Preferred Return Example:

• An investor with $100,000 invested receives $5,000 annually as a preferred return.

Additional Cash Flow Example:

• If the property generates $100,000 in distributable cash flow after the preferred return, the investor would receive an additional $7,000 if they hold a 10% share.

Capital Event Example:

• Upon a successful sale resulting in $1,000,000 of profit, the investor would receive $70,000 from the capital event if they hold a 10% share.

Total Example Investor Returns (Over 5 Years):

1. Preferred Return: $5,000 annually, totaling $25,000 over 5 years.
2. Cash Flow (Example): $7,000 annually, totaling $35,000 over 5 years.
3. Capital Event (Example): $70,000 from the sale after 5 years.

Total Return: $130,000 on a $100,000 investment over 5 years, resulting in a 30% return on investment, not accounting for the return of the initial capital.

This detailed breakdown and examples help clarify how the distribution structure benefits the investors, ensuring they receive their preferred return and share in the profits both from ongoing operations and any future capital events.

 

 🧮 Tax Benefits for Limited Partners

Investing in real estate, particularly as a limited partner in a syndication, offers several tax benefits that can enhance the overall return on investment. Below is a breakdown of the key tax benefits and an example of how they might apply to an investor in the Prince Gregor Apartments project.

1. Depreciation:

• What It Means:
  • Depreciation is a non-cash deduction that allows you to write off the cost of the property over its useful life, typically 27.5 years for residential real estate. Even though the property may be appreciating in value, the IRS allows you to deduct a portion of its value each year, which reduces your taxable income.
• Example:
  • Let’s say the building value (excluding land) of Prince Gregor Apartments is $2 million. Dividing this by 27.5 years, you get an annual depreciation deduction of approximately $72,727. If you’re a limited partner with a 10% share, you would receive a depreciation deduction of $7,273 annually.

2. Mortgage Interest Deduction:

• What It Means:
  • The interest paid on the mortgage for the property can be deducted from the rental income, which reduces the taxable income generated by the property.
• Example:
  • If the mortgage interest for the year is $100,000, and you hold a 10% share as a limited partner, you would benefit from a $10,000 deduction against your share of the income.

3. Passive Income and Losses:

• What It Means:
  • As a limited partner, your investment income is considered passive. If your share of the property’s deductions (such as depreciation and interest) exceeds the income it generates, you can use these passive losses to offset other passive income from other investments, or in some cases, carry them forward to future years to offset future income.
• Example:
  • Suppose the property generates $10,000 in rental income for you, but after accounting for your share of depreciation ($7,273) and mortgage interest ($10,000), your taxable income is negative. You could use this $7,273 passive loss to offset other passive income or carry it forward to reduce taxable income in future years.

4. Capital Gains Tax:

• What It Means:
  • When the property is eventually sold, any profits (capital gains) may be subject to capital gains tax, which is generally lower than ordinary income tax rates. If held for more than one year, these gains are taxed at the long-term capital gains rate.
• Example:
  • If the property is sold after 5 years and your share of the capital gain is $70,000, this amount would be subject to long-term capital gains tax, which is typically 15-20% depending on your income level, rather than your ordinary income tax rate.

5. 1031 Exchange:

• What It Means:
  • A 1031 exchange allows you to defer paying capital gains taxes on the sale of a property by reinvesting the proceeds into another “like-kind” property. This can be a powerful tool for wealth building.
• Example:
  • If the property is sold and the partnership decides to reinvest in a new property, you could defer paying taxes on your $70,000 capital gain by participating in a 1031 exchange, rolling those gains into a new investment property.

Combined Example: Tax Benefits for a $100,000 Investment Over 5 Years

1. Depreciation Deduction:
   • Annual deduction of approximately $7,273.
   • Total depreciation benefit over 5 years: $36,365.
2. Mortgage Interest Deduction:
   • Annual deduction of approximately $10,000.
   • Total interest deduction benefit over 5 years: $50,000.
3. Passive Losses:
   • If the property’s deductions exceed income, you can offset $7,273 annually in other passive income or carry it forward.
4. Capital Gains Tax:
   • $70,000 capital gain taxed at the long-term capital gains rate of 15-20%, saving on ordinary income taxes.
5. 1031 Exchange (Optional):
   • Defer capital gains taxes by reinvesting in a new property through a 1031 exchange, allowing your investment to grow tax-deferred.

Summary of Tax Benefits:

• Total Depreciation and Interest Deductions Over 5 Years: $86,365.
• Potential Savings on Capital Gains Tax: Significant reduction due to lower long-term capital gains rates or deferment through a 1031 exchange.

These tax benefits, combined with the expected cash flow and appreciation, make investing as a limited partner in the Prince Gregor Apartments an even more attractive opportunity, as they enhance after-tax returns and contribute to long-term wealth accumulation.

 

 

Prepared by,  Bryan Chavis