GFIV Flashcards
MID INTRO: GFIV & QOZ II
Last two funds are pretty similar from a strategic perspective. They are exclusively 100% ground up development. As a firm, we are putting a lot of our chips here. We’ve been in the multifamily development space since 2014.
We stopped purchasing assets in the beginning of the pandemic when they started trading at premium to replacement cost.
GFIV INTRO:
We like development in the markets we are in - the Sunbelt region and its fast growing. You have a huge supply/demand imbalance that Growth Fund IV SOLVES.
Growth Fund IV is a portfolio of 100% ground-up developments in high-growth markets across the southeast and southwest United States.
Development Period?
The first four years is no income just pure growth. Projected returns over the 4 year Development Period is 14-16% net IRR which translates to a 1.7x – 1.8x net equity multiple (IRR is annually and compounding). Once the fund has stabilized and reached the Operational Period, you’ll have the option to fully redeem or stay in the fund.
Before the Development period ends, we will survey investors 5-6 months in advance to get a better sense on who will redeem. We will likely sell an asset or 2 to meet this.
Operational Period?
If you do decide to stay in the Fund, the targeted return during the Operational Period is 8% - 11% annually with an annual quarterly distribution of 7-9%.
Ex: Invests 100k = 9,000 annually = 2,250 quarterly
Deals?
We have closed on 8 deals and 4 are in due diligence
○ We are typically the LPs in each development deal and in certain cases we are Co-GP as well.
○ We do extensive vetting on all our developers and we have a right of first refusal to provide limited partner capital.
GP/LP Structure?
○ GP/ LP structure: There is always some deal level waterfall, typically 2-3 tier. Our acquisition team keeps this confidential, we don’t have the liberty to give out exact terms. It is IRR / multiple based and we negotiate every single one. FAIR preferred return on the fund.
Hedging Strategies?
- FIRST, This is not a DIRECT hedging strategy but we enter GMP contracts (Guaranteed Maximum Price) which tell our contractors we will only pay a specific amount of money. We lean on our vertically integrated partners and relationships we’ve establish by being boots on the ground.
- We use swaps and swaptions to hedge future interest rate risks. To date, 68% of our total debt has interest rate hedging in place.
○ For our deals almost out of ground or out of the ground we use swaps and engage with banks to do this. Using Swaps allows us to fix all or a portion of the cost of debt in the future with permanent financing.
○ For our deals that are NOT close to being out of the ground we use swaptions.
Swaptions are options to enter into a swap at a future date. Similar to swaps, we enter into these agreements with our counterparties which basically says we’ll have the option to take fixed rate and they will take floating rate risk.
○ We’ve been very successful at this. Ex: First Swaption was bought back in Jan and we cashed in May, this made $23mm across all of our funds, offsetting higher cost of debt. Then, when the 10yr dropped back in June again to 2.5% we bought some more. We’ve made roughly $42mm to date in hedges.
FEES?
- 0.5% acquisition fee on gross development costs (Equation = 0.5/.25 =2% = built into NAV). During development, 5mm or above = 1.25% management fee, Below 5mm = 1.5%. After development period, both classes go down .25%
- 8% preferred return. Above 8%, Origin will split 50/50 until Origin receives 15%. Returns over 15% get split 85% to investors / 15% to Origin.
EX: Example: $100k investment, 20% total return
Performance fee structure - 15% after 8% preferred return (50/50 catchup)
Preferred Return (8%) - 20% return so $20,000 = $1,600 to investor
50/50 Catchup - investors and Origin split returns 50/50 until origin receives what’s equal to 15% or ($3,000) = 20,000 return x 0.15
Returns over 15% get split 85% to investors / 15% to Origin
Liquidity?
○ Before the Development period ends, we will survey investors 5-6 months in advance to get a better sense on who will redeem. We will likely sell an asset or 2 to meet this.
○ After the 4yr term, redemptions can be made on an annual basis (within 12mo). The fund limits the amount of each tender offer to 5% of the Fund’s NAV as of the tender date. If oversubscribed, will be done on a prorata basis upon capital contributions. We will either leverage, refinance, sell, lease or monetize to meet these offers.
○ Origin is required under the operating agreement to pull out 50% of our capital at Year 4.
TAX:
- K1s in each state; No income in the first 4 years but still gets sent. Year 5 option to elect composite. A composite will satisfy state level taxes for investors on their behalf without having to file K1s for those state. There needs to be more than 1 eligible state to put in the composite. Less tax fees for investor.
○ No depreciation in the initial years but also no income so it’s really net neutral. After 4 years, we can start claiming depreciation and offset ordinary income.
Capital Call
LAST close Q1 2023; This is a DRAW DOWN Capital structure. 50-60% will be called in FIRST and remaining 40-50% in 8-10 months (never say a set date)
- $165mm raise to date, target raise is $250mm, closing March 2023
Preferred Return Mechanics?
The moment you join the fund your capital earns accrued interest, cumulative and compounding. It’s basically an investor to investor transaction where if you get in the fund later, you’re going to be paying the earlier investor their preferred return The earlier investor gets compensated for taking the risk. Everyone in a closed end fund is eventually equalized. There’s an equalization component with a true up provision.
LEVERAGE?
75% Loan to cost basis. At stabilization, it will tamper down a bit after we refinance and the properties increase in value to 65%
