UAA Case Study x April 2024

Our founder and CEO, Tim O'Brien , was recently inspired by a lively discussion around transparency in showcasing highly successful investments as well as scenarios where our team had to adjust and solve for the unexpected. He shared a recent case study where our team had to restructure an investment and work to extend the life of our business plan:

April 17, 2024

About a month ago, Aleksey Chernobelskiy asked this question on LinkedIn: ? “Should a GP continue raising money after losing money on a deal?” He proceeded to say that “Many people have opinions on this, while forgetting the fact that investments are inherently risky and some of the best investors in the world lost investor capital at some point.”

He shared that he personally feels that context and disclosure matters a lot, but that he is in the "yes" camp in most of these cases and that of course it goes without saying that it is on the LP (Investor) to do proper due diligence to ensure they understand what they're investing and getting into. ? The comment section was great and the subsequent discussions that occurred because of this somewhat “simple” question were even better. So much wisdom was shared. So much perspective, empathy, and encouragement as well. Before I continue, I should say that if you don’t follow Aleksey on LinkedIn already, I would encourage you to do so. His perspective and advice is game changing and he is initiating discussions that will serve our industry well. I am personally a paid subscriber at https://www.lplessons.co/ and it is worth every penny. Please note this is not sponsored and I have never personally met Aleksey or even conversed with him. It is just good content that I would be remiss not to share with you all. ?

As I considered this question and thought about how it pertained to our track record, current positioning, marketing, and performance, I felt inspired to share more about not only our successes but also some of the challenges we’ve had to overcome and while this specific project didn't necessarily "lose", had we not dug our heels in, adjusted our business plan, and found a solution that fit those changes, this project would have eventually experienced a loss of equity. This is what 30+ years of transacting, sponsoring, developing, and managing real estate will get you. The experience and knowledge to know how to solve for market dynamics. To know where you can push and pull and more importantly, when to push or when to pull. This project and Aleksey's question really showed me that I am just as proud of these case studies as I am some of our most successful returns.

With that being said, I wanted to share with you a recent case study our team at UAA tackled with transparency and creativity. The Artisan apartments (54 units) were delivered in April of 2020 in Portland, Oregon right as the pandemic had taken hold. As we navigated unprecedented circumstances, our lease up strategy was forced to evolve. Stabilization was delayed, taking 14 months versus the originally projected five, and retail leasing was essentially non-existent across the entire market.

Our original business plan was to build, stabilize, and sell in year two. As we explored this scenario, it was evident that selling the project in 2022 was not going to produce the returns needed to fulfill the original business plan. For that reason, our asset management team worked to keep the building occupied and manage expenses while our investment committee evaluated the best course of action as our construction loan was coming due. Our options were to sell the building or refinance. However, with the Fed Monetary Tightening to rein in inflation by drastically and quickly raising interest rates; this resulted in unstable capital markets, and we found ourselves in a deep real estate recession. While unexpected, these scenarios are why UAA builds flexibility and optionality into every deal allowing us to pivot and respond in even the most volatile environments. We are diligent in our underwriting, conservative in our leverage, meticulous in our structuring, and we are steadfast in our asset management.

Due to how we underwrite and structure our deals, we aim to negotiate longer loan terms than we think we will need, we negotiate pre-payment flexibility, and we keep it simple. We’re not going to over leverage an asset to make it pencil or try to potentially increase returns at the expense of much higher risk and flexibility. We’re not going to participate in optimistically hypothetical outcomes or programs. Our time, effort, and strategy largely revolve around nurturing relationships, building partnerships, and mastering our service model to create the best risk adjusted investment opportunities for our clients. In other words, we aim to find the best balance between risk and return with an eye to the longer term success of our clients and as a result our company.

Artisan was no different. Due to a long-standing and trusted relationship with our construction lender, we worked collaboratively with them to extend our construction loan while evaluating how best to position Artisan to preserve equity and extend the life of the business plan. We also did not want to try and put together a quick fix that could backfire 2-3 years down the road when we weren’t certain that would be enough time for the markets to correct and thrive again.

Our investment committee set up a preferred equity structure that would allow us to refinance in an environment where terms were more volatile than ever. We offered current investors the first right to fund as much of the preferred equity as they wanted or were able and then offered up the opportunity to a select group of new investors. This was possible primarily due to us not overleveraging the original construction loan and so the amount of our “Cash-In” refinance was achievable, realistic, and low enough in the capital stack to make it compelling to new pref equity investors.

As we evaluated new debt for the project, we were patient, and we were strategic. We looked at the cost of the capital, we looked at the timeline, we looked at pre-payment flexibility, and we evaluated all of this against macro and microeconomics. Through our network, we were able to attract a lender who believed in the project, in our business plan, and in the opportunity. A lender who was able to offer reasonable flexibility for pre-payment and extensions as needed with enough time to execute the business plan. We were transparent, we were honest, and we were conservative. All trademarks of doing business with UAA.

While this project did not deliver on the original business plan due to factors well outside of our control or prediction, we are proud of how we were able to solve the revised needs of the investment. We know many of our friends, family, current, and past investors have found themselves in similar situations with sponsors who are not able to or are unwilling to respond in such a creative or agile manner or in situations where the original structure was established without proper evaluation of risk and the project had/has no equity to preserve. We would be happy to sit with you or your team to discuss Artisan’s story in more detail and see if we can offer up expertise, make an introduction, or help in any way. Please do not hesitate to reach out to continue having a conversation together.

Tim O'Brien

CEO & Founder

Urban Asset Advisors

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