Why do you syndicate real estate deals?
Syndication allows us to spread our capital among a larger number of properties and to acquire bigger properties than we could ourselves. It provides the scale necessary to establish a professionally managed, vertically integrated real estate investment company. Finally, we enjoy the challenge of finding and closing deals and managing them to a successful exit.
What is your investment thesis?
We search for commercial real estate (CRE) located in submarkets and neighborhoods with good tenant demand and expected future growth. We target multi-tenant office, medical, and industrial buildings that need capital improvements and upgrades but that come with an established tenant base.
With companies adopting more remote work strategies, will demand remain strong for office space?
Office space demand will remain strong as licensed professionals need office space to meet with clients and small business owners need office space to house their teams. These tenants seek the office space we offer (i.e., 500-5000 SF) in the suburbs as it puts their office close to where their employees and clients live. The high rate of new business startups is driving up office space demand as are larger employers that are establishing smaller satellite offices in the suburbs to entice employees back into the office.
How do you find your deals?
We identify deals through a top-down approach. We target a specific market (e.g., Memphis MSA) and thoroughly research that market and its submarkets. Next, we drill down to the neighborhood level, within the most promising submarkets, and we scout out the best locations and create a target property list. We source our deals by approaching owners of properties on our target list and by networking with brokers active in those areas.
What are the expected returns on your deals?
We generally expect 7-10% Cash on Cash returns from annual operating income and 12-18% IRR over the asset’s holding period.
We’re not overly confident in our abilities to forecast property values at the end of the holding period, so we use conservative estimates in our financial projections.
What is the average holding period for your deals?
Our average holding period is five years.
The actual holding period depends primarily on where we are in the real estate market cycle. In a down market, we would most likely hold the asset until the market comes back up, while in an up market we might sell earlier than planned.
How often are cash distributions made to the Limited Partners (LPs)?
What is the timing on making cash distributions?
During the first 12-24 months, there are NO cash distributions as we are making capital improvements and working to get the property income-stabilized (i.e., increase occupancy and rent rates to target values.)
Once we are income-stabilized, the initial monthly cash distributions are 50% of the Net Cash Flow, and we ramp this up to 80-90% over the next two years. The retained portion of the Net Cash Flow is based upon our forecasts for tenant improvements, leasing commissions, and replacements of capital items.
After property disposition, the majority of the cash reserves are distributed along with the net sales proceeds. Some cash reserves will be retained until all the legal entities are dissolved.
What are your management fees?
We are paid fixed management fees for acquisition, refinancing, disposition, asset and property management activities. These are determined on a deal by deal basis. The fixed management fees compensate us for the time, effort, and resources required to complete these activities.
On the LP/GP profit-split, we offer a direct profit-split formula (% split of cash distributed.) A direct profit-split is simple and transparent, and it creates a performance compensation structure close to an equity partnership. We also offer a preferred return option to our investors since this is the industry norm.
Can LPs liquidate their position before the property sells?
LPs should expect to remain in the deal for the entire holding period as we don’t offer buy outs to our LPs.
The operating agreement has provisions for LPs to find a buyer for their interests, but the transaction must be compliant with all securities regulations, the operating agreement, and approved by the GP. LPs should be aware that buyers of these securities will expect deep discounts to fair market value.
Do all investors need to be a Accredited Investors?
YES. This allows us the opportunity to promote and advertise the offering as allowed under Rule 506(c) of Regulation D of the Securities Act. We wish to partner with investors who can invest in multiple deals and commit their capital for long periods of time.
What is the minimum investment amount?
This depends upon the size of the capital raise. For a $1M deal, the minimum might be $50K, while for a $4M dollar deal the minimum might be $100K.
Does the deal sponsor co-invest in each deal?
YES. We add 5-10% of new capital (as cash) into each deal. The actual percentage is a function of the size of the deal. We know our LPs want us to have “skin in the game” and we are real estate investors first and foremost.
How do you manage risk?
We do not pursue high return deals with the goal of earning high profit-splits (or promotes) because that leads to trouble. High returns correlate with high risk. We offer deals that we are comfortable with and that have a high likelihood of preserving our investors’ capital and bringing them a positive return.
For each deal, we develop a risk management plan that defines the needed insurance policies and contingency plans. We set the debt level and manage the cash reserves to ensure a strong balance sheet. Each property is owned by a single-member LLC that in turn is owned by a multi-member LLC that contains the partnership. We comply with all applicable laws and regulations, practice good corporate governance, conduct our business to the highest ethical standards, and treat our partners, investors, and tenants with proper respect.
Do you have a “key man event” plan?
YES. If the Managing Principal, Chris Niederer, is no longer available to lead the company then his wife, a business consultant, will initiate the key-man event plan by engaging the firm’s law firm to unwind and dissolve the enterprise. Property management will transfer to third-party property managers, and all the properties will be sold for fair market value. A key man insurance policy will provide funds to pay for all necessary legal and management services.
How do you finance your deals?
For properties valued under $2M, we use recourse loans sourced from local banks and we guarantee those loans. For larger deals, we work with mortgage brokers to source a non-recourse loan.
How large a CRE portfolio will HAPGOOD CAPITAL create?
Our five-year strategic objective is to control a $20M commercial real estate portfolio. Ultimately, we aspire to build a CRE portfolio in excess of $200M.
How did you come up with the company name?
Hapgood is an old family name. Specifically, Hapgood is the middle name of the founder’s great-great-grandfather, George Hapgood Stone. George moved to Colorado Springs in 1881 to become Colorado College’s first professor of geology and zoology and lived there until his passing in 1917. He was an early expert on the geology of the Pikes Peak region of Colorado.