Aspen Funds is excited to pursue the acquisition of Madison Overland Park, a 200-unit, 1999-built multifamily property in the Overland Park submarket of Kansas City.

Current ownership acquired the asset in 2019 and executed a moderate value-add. Although consistently addressing deferred maintenance, Madison OP trails competitors from an exterior, amenity, and overall design standpoint.

To better serve the market and keep up with Class B+ product, Aspen will renovate the remaining 87 interiors to a higher scope including quartz counters, stainless steel, new LVP, modernized fixtures, etc.

Exteriors have been recently painted, and Aspen will power wash the brick façade throughout. The plan also includes replacing the inoperable irrigation system, significantly enhancing grounds and curb appeal.

Amenities will be significantly improved, notably adding a resort-like outdoor amenity on the extra parking space near the pool/clubhouse. A pickle ball court will also be added.

Rent premiums: projected $503/unit overall. New signed leases on currently renovated units are approaching pro forma levels, trailing $110 and $160 respective to 2/3 bed pro forma projections.
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Aspen is under contract subject to the in-place Fannie Mae loan at a fixed 3.90%. Aspen will fill remaining leverage with $12,000,000 of Preferred Equity, bringing total *LTC to 71.1%. An experienced, local capital group will be the provider (7acre).

Terms include a 14% overall return with an 8% annual soft pay. Preferred Equity does not participate in upside and simply achieves a fixed rate of return on their investment. LP equity is subordinate to preferred equity.

*Loan-to-cost (LTC) compares the financing amount of a commercial real estate project to its cost. LTC is calculated as the loan amount divided by the construction cost. Meanwhile, loan-to-value (LTV) compares the loan amount to the expected market value of the completed project.

FAQ
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1 – Why is there no cash flow in year one?

There is one huge distinction to make on this deal, the deal is projected to have cash flow starting from day 1, so there is a difference between a property that does not have any cash flow, and a property that is not paying a cash distribution. THIS PROPERTY IS PROJECTED TO BE CASH FLOWING RIGHT FROM CLOSE. This is important because cash flow is a risk mitigator. The reason there is no cash distribution is because of one of the big factors of this deal, and that’s private equity and their position on the deal. A local private equity company has committed $12M as a preferred equity partner with no equity upside. 

Because of this, a few things happen:

First, it makes common LP equity almost twice as valuable with nearly half the raise committed from a party taking no equity upside. Second, private equity is projected to receive the projected cash flow distributions from year one. A majority of the cash flow for common LP equity is projected in our refinance which has favorable tax considerations (consult your CPA), as opposed to being paid out in a distribution which is taxed. So, while common LP equity is sacrificing year 1 cash distributions, the gain on the back side with the additional value of equity and the favorable tax considerations of returns coming from a refinance as opposed to a distribution we believe greatly makes up for it.

2 – Why is the current seller selling?

This is another Unicorn aspect of the deal. The current seller is selling because of distress they’re facing in their current portfolio in Pennsylvania. This is a unicorn aspect because everyone wants to capitalize on distress, but they think the best way to do that is to buy a distressed deal. But distressed deals are distressed for a reason. It’s not as common that a buyer wants to buy a distressed property as much as a buyer wants to capitalize on a distressed seller. A seller experiencing distress in other aspects of their portfolio is the best case scenario for investors to capitalize on distress without taking on a distressed asset. Current ownership also wanted to scale in Kansas City but it proved too challenging as they are running their ~3,000 unit portfolio in Pennsylvania.

3 – Is property management vertically integrated?

Yes, property management and construction management are vertically integrated. This is another Unicorn aspect of the deal! Through partnerships we’re able to bring these 2 factors in-house which is huge for the current state of construction management, rising cost, and inconsistent labor. This will help us have more control over our costs as we execute on our value add strategy. This combined with our assumed fixed rate loan at 3.90% are two huge risk mitigators of this deal.

4 – Has this property been stress tested for recessions?

Yes, this property has undergone very strong stress testing with many aspects of the business plan. We’ve tested very high interest rates (up to 10%), misses on income projections, inflated expenses, inflated loss to lease, rising construction costs, higher vacancy rates, and exit cap rates as well and are still in a strong position to clear our capital stack. We also feel this is the exact type of property and location you want to be invested in during a recession. Large B+ units in the best school district in the state where historically the effects of recession will be mitigated relative to class A developments and class C or D areas with a tenant base that is typically more impacted by recessions.

Other Resources:

• Deck Slides
• Drone Video
• Madison-KC-UW-Model-DR.xlsx