Asset Performance and Details

What is the current status of the asset? What is the current occupancy and rent collection?

Riverbend Apartments is a performing property that the Sponsor will be updating as the units
come up empty. This will keep the property cash flow positive during the course of work on the
interior of the units.

Current occupancy is ~ 92.36% effective occupancy and 94.67% leased as of 7/30/2020

As per recent sponsor update:
July total Billings $828,496
Collected as of 7-27 $796,711
Percent collected 96.16%
We will finish in the 98.5% to 99% collected for July

What is the break-even occupancy?

According to the sponsor, at 65% occupancy the property breaks even with the first mortgage.

At 81% effective occupancy, the property breaks even with the first mortgage plus the preferred equity dividend.

How are the school districts in this area?

Riverbend Apartments is located in the Metropolitan School District of Washington Township. According to Niche, this is “is a highly rated, public school district”, top 3 in the county.

This is an A-tier Area. We had an investor in the deal drive through the area, and another investor that used to live in one of the units of the asset – it’s an irreplaceable location.

Cash Flows and Returns to Investors

What is the expected duration and projected return on investment?

Based on the sponsor projection of cash flows and exit in year 5, and following the feeder fund waterfall, the projected ROI:

– 17.8% IRR based on a 5 year hold (projected sale at the end of year 5).

NOTE: These are forward looking projections, and actual results may vary materially if the project takes more or less than 5 years, and may differ if there is a refi and return of capital event.

At what point will Investors start seeing a return on investment?

Sponsor projects to cash flow positively even through the three year renovation period. Year 1 projection of cash flow is just under 4% per year to be distributed quarterly, and then cash-flows are projected to improve gradually as units are renovated and lease-up at higher market rents. The feeder fund will distribute on a quarterly basis as the sponsor makes distributions to the feeder fund, following feeder fund waterfall.

Based on the five year expected timeline, can you confirm what the distributions are anticipated to be?

Based on Sponsor Projections, Year 1 projected cash flow is at 3.95% and year 5 right under 10% cash on cash return, this is the cash flow from the project to be distributed quarterly. So, year 1 to year 5 cash-flows are projected from just under 4% to just under 10%, as the Sponsor improves the units and raises rents the cash flow will increase. There will be less cash flow in the earlier years and increase over time.

Sponsor has projected this to be a 5 year deal, could be less or more depending on market conditions, and what would generate best returns to Sponsor and Investors.

Is there a Preferred Return?

Riverbend Investments 11235 LLC (feeder fund) has invested in LP (Limited Partner) units of the Pepper Riverbend Investors, LLC (Limited Partner entity of the project). This investment in Pepper Riverbend Investors has 12% Preferred return and 80/20 (LP/GP) split above that.

Investment in class B units of Riverbend Investments 11235 LLC (our offering) does not have a separate preferred return. It has a 80/20 (Class B units / Mgr) waterfall.

Effectively, class B units of Riverbend Investments 11235 LLC, have exposure through our feeder fund waterfall to the 12% Preferred return Riverbend Investments 11235 LLC is entitled to.

I would like to know what % of the deal goes to the sponsor and your company. What portion of every dollar of income that Riverbend Investments 11235 LLC (“feeder fund”) receives from Pepper Riverbend Investors, LLC (LP of the project) will go to Class B units of the feeder fund?

The very high level estimation is that after all expenses (feeder fund management, administration, legal, accounting, tax filing, performance fees, etc), Class B units are projected to receive 68% of every dollar of income / capital gains that we receive. Sponsor IRR projected to us (Riverbend Investments 11235 LLC – feeder fund) ~ 26.1%. We took that applied comprehensive math and are estimating that 68% is what goes to you (Class B investors) ~ 17.8% estimated IRR.

This is applicable to all cash-flows and back-end sale. Return of capital will pass through without any waterfall, if exit is through a refinance.

Why are cash-flows / distributions different from Preferred Return (“Pref”)? Shouldn’t Investors always receive at least the Pref as cash-flows?

People at times confuse Preferred Return and Cash Flows. They are completely different.

Preferred Return is the minimum return investors must receive before the Sponsor gets their Promote or Performance fees. So, if the project cannot meet Pref rate to investors, then the sponsor doesn’t get any performance fees/promote.

Generally speaking, value-add projects don’t have enough cash-flow to meet the Pref from the operating cash-flows. So, Pref gets underpaid (but it is cumulative) and so it needs to be caught up at the time of the sale event.

On this project, cash-flows are NOT projected to meet the Pref from the operations. In this case they will be caught up on the sale event.