Much has been said and anticipated about Millennials, the largest population group to emerge since Baby Boomers. They prefer a “hands-free” lifestyle, and place significant value on social interaction, experiences, and technology. They value personal time more than their jobs, but they want the flexibility to pick up and pursue their next career opportunity. And they’re foregoing home ownership to maintain that flexibility.
Boomers, however, are reaching an age where homeownership is more of a chore than a comfort, and some are sacrificing homeownership for apartment living in large urban areas for ease of living, more modest housing costs, greater access to culture and amenities, and sometimes, jobs. And here is where the two groups merge: apartment living, which offers many benefits to both worlds, in particular, convenience. As a result, apartment living has rapidly supplanted homeownership. Not surprisingly, apartments are hot and offer compelling investment opportunities.
Clear Capital, LLC is a real estate investment firm with offices in Los Angeles and Irvine that has, for the last 20 years, followed this trend and successfully pursued investments in multi-family real estate. “Clear Capital holds a long-term and persistent belief that apartments have supplanted homeownership and substantially fulfill today’s American dream, for both Millennials and Baby Boomers” according to Eric Sussman, one of Clear Capital’s Managing Partners. “Among other things, this belief is based on the fact that rising home prices, higher interest rates, and tighter underwriting standards have created affordability challenges, and it’s therefore more difficult to qualify for a mortgage.”
Meanwhile, the supply of multifamily projects targeting both groups has generally not kept up with demand, he says, due to increased construction costs and challenges associated with new development. So the company’s goal is to create value in by acquiring existing properties meeting strict criteria, redeveloping and/or repositioning them, and holding them
for three to ten years before selling. This strategy has provided stable and predictable cash flow for investors, says Sussman as investors have received consistent quarterly distributions and impressive, double-digit internal rates of return (IRR). On several of the company’s projects, investors have received a complete return of investor capital within just a few years, while retaining ownership and ongoing cash distributions.
The company is focused on specific areas of the Sun Belt, including Southern California (Los Angeles and the Inland Empire) and, more recently, the Dallas/Ft. Worth market. Other members of the team, including partners Greg Worchell, Daniel Hardy and Paul Pellizzon, use their collective and extensive experience in real estate acquisitions, asset management and structured financing to acquire underperforming and undervalued multi-family assets. Properties must have strong value-add potential. Through remodeling and repositioning, the properties are improved with high-quality amenities — Wi-Fi, upgraded community recreation areas, dog parks, workout studios, pools, playgrounds and furnished outdoor gathering areas — that command higher rents and attract renters seeking an upscale, amenity-rich and all-inclusive community. Clear Capital has successfully invested, remodeled and managed more than 50 multi-family properties using this strategy.
“Our success has come through creating value at every step of the investment cycle: identifying, acquiring, improving and monetizing multi-family assets,” says Sussman. “By investing with Clear Capital, investors can earn a six percent (6%) annual preferred return (paid quarterly), with significant upside resulting in IRRs of 12 to 15%, or more. Since inception, Clear Capital’s annualized return on investment on properties sold, net of cash distributions, has been 18.13%.”
Following specific investment criteria, a disciplined approach, and substantial market analysis and asset-level due diligence has allowed the company to present compelling opportunities for their network of investors. Real estate agents and brokers often present these opportunities to the company, specifically because of their track record, experience, and the trust they have earned over significant periods of time and different market cycles. “We typically don’t move away from our secret sauce, but it doesn’t mean we won’t take a look at a good opportunity outside of our criteria,” Sussman says.
Clear Capital acquisition criteria:
• Property size: 100 units and above
• Vintage: 1970 and newer
• Markets: Sunbelt regions
• Location grade: A+ to B-
• Property grade: A- to C-
• Hold period: 3 to 10 years
• Price: $15 million to $50 million
• Purchase terms: All cash or cash plus debt from lenders and financial sponsors
• Due diligence: Ability to purchase with an aggressive due-diligence window and fast close
Clear Capital prides itself on taking an investor-first approach. “We are straightforward, ethical and transparent in all aspects of operations,” says Sussman. “Our Clear Capital investors, many of whom have been with us for over 20 years, look for diversification from traditional asset classes and want to invest in real estate with none of the headaches associated with direct asset ownership.”
Clear Capital invests substantial sums alongside its investors, in order to appropriately align objectives and interests. “While past performance is no guarantee of future results,” says Sussman, “we are confident that our approach to investing is one of the best ways to participate in the growing demand for multi-family housing.”
The process of investing is easy. After receiving the investment offering, which includes a detailed investment summary of the property, an accredited investor can complete the entire process electronically (hard copies are always available for those who prefer it). The company offers online investing through its user-friendly investor portal which allows the investor to review, monitor and manage their investments, including the ability to receive quarterly distributions directly into their bank accounts via automated ACH.
Although capital markets for multi-family debt are strong and flush with lenders, the demand for multi-family assets has increased rapidly over the past few years and it has become more challenging to find deals that meet the company’s investment objectives. “Our approach to investing hasn’t changed and will not change, however,” says Sussman. “We are patient, underwrite to our strengths, complete rigorous due diligence to identify opportunities and then remain attentive and committed to the operating performance of each acquired asset. In other words, we acquire at our price, remain disciplined, and are not swayed by shifting and shorter-term market swings.”
In markets such as Dallas/Ft. Worth, the threat of oversupply looms, but Sussman doesn’t believe it will hamper Clear Capital’s goals. According to a recent Forbes article, the Dallas-Plano-Irving area is the third-fastest growing metropolitan district in the U.S. in jobs, population and wages. Just as quickly, Dallas has experienced a large increase in multi-family building permits and has delivered units so rapidly that Sussman believes it is due for a small pullback. “Nevertheless, we believe in our strategy and, as a result, we acquired an asset in the Dallas Uptown submarket,” he says. “We saw an opportunity where our management experience could come into play to quickly change the tenant profile, significantly reduce concessions, and increase value to our investors.”
The company is poised for additional growth along the Sun Belt region and the Pacific Northwest, including Denver, Phoenix, Portland and Salt Lake City. A potential challenge in California, however is the possible repeal of the state’s Costa Hawkins Rental Housing Act in November (when the issue will be voted upon by California voters), which removed certain rent control caps and the ability of cities to modify rent control policies. While he expects the ballot measure to fail, Sussman says it would, if passed, only make matters worse for both tenants and property owners.
Regardless, Clear Capital plans to forge ahead using its time-tested model that has generated superior returns for investors. The firm is especially pleased that it has never lost any investment capital during its history, including several significant economic downturns. Currently, the company controls more than $500 million of multi-family real estate assets, and is clearly set on a robust path in the future.