I've spent some time reviewing the prospectus, operating agreement, and had a due diligence call with the developer. I also re-built their cash flow projections with some more conservative assumptions.
Overall, I feel pretty good about the deal. There are certainly risks, but the risk/reward profile seems reasonable. Using my more conservative assumptions, I see a reasonable possibility of an 8% ROE*. More optimistic assumptions could yield up to a 17%-20% ROE*.
Summary:
-This is the second round of financing for this project. The first round was used to acquire land and get all entitlements approved.
-Construction will take ~2 years. The project will be refinanced from a construction loan to more traditional financing. Market conditions will determine whether they sell the property or hold it. I would have no say in this as a minority investor.
-*The refinancing would include a distribution of contributed equity back to investors. The "E" in the ROE calculation above would be based on a lower equity amount than the initial capital being put at risk.
-Based on my cash flow model, the 8% ROE is based on today's market rents and a 10% vacancy rate (the local market is currently at ~5.5% vacancy). Assuming lower vacancy, and some inflation in rents gets to the ~17-20% ROE. The project completely blows up if rents decline by more than ~10%
-I'm considering putting 2.5% of my investable portfolio into this project.
Pro's:
-This is their third comparable project. It is slightly larger than the other two, but not by much. The first project did well (I don't have specific numbers, but I personally know several investors that are happy). The second project is still underway. They admittedly have had a big boost from Mr. Market over the last few years.
-A number of investors in the project are the same investors that backed the first two projects. My wife also knows several of the investors as people who have made good livings in real estate investing.
-My checks into current market rents and vacancy assumptions didn't turn up any discrepancies with their financial model. There were a few areas I wanted to be more conservative, but I didn't think the assumptions were actually out-of-line.
Con's:
-The project is in a new city for this developer
-The property does sit near some train tracks. There is another property with comparable rents on the same tracks.
-The project is in a part of town that is showing signs of gentrification, but isn't there yet. While it's reasonable to think the neighborhood could improve, there's a non-zero probability that the neighborhood could revert in a downturn.