Aspire Westminster (Aspire) is an $18 million preferred equity real estate investment that is part of the Origin IncomePlus Fund’s portfolio. This Denver-area multifamily development is expected to be completed in 2021 and will feature 226 apartment units and 34,500 square feet of ground floor retail space. Aspire was a compelling project because it offers equity protection, provides a compelling 13% return, is owned by an experienced development partner and is in a strong location.
Preferred equity investments play an important role in the IncomePlus Fund’s strategy by providing stability and consistency of returns. A preferred equity investment sits in a protected position in the capital structure and can withstand a market decline of more than 20% before any capital is at risk. Our experience owning, acquiring and managing more than 4,000 units directly gives us a distinct advantage to provide preferred equity to reputable sponsors and fill capital gaps where banks will not.
Our capital never exceeds 85% of the cost of a ground up development meaning that we require the sponsor to contribute at least 15% of project’s required capital. In Aspire’s case, our preferred equity occupies between 52% and 75% of the capital structure. It sits behind $47 million of senior bank debt and ahead of $22 million of common equity.
Additionally, developers build to make a profit and the developer’s profit margin adds an additional buffer of safety. In this case, the project’s value upon completion is estimated to be worth at least another $10 million. From a loan to value perspective, our first dollar of risk is at 66%, meaning Aspire’s value could decline by 34% before our IncomePlus Fund investment is at risk.
A Compelling 13% Return
Our preferred equity position in Aspire generates roughly 13% per year or $2,340,000 for the IncomePlus Fund. $16 million of the investment accrues while another $2 million is paid current. It may seem counterintuitive to think that the IncomePlus Fund, largely designed to deliver income, would invest in non-cash flowing investments, but there is a good reason.
More than 60% of our investment partners opt in for the IncomePlus Fund’s dividend reinvestment policy (DRIP) which means they opt in to take shares in lieu of cash. The DRIP is a great way to compound investment returns and is a way for investors to let the income accrue in the very same way our preferred equity investment accrues.
If we were to only invest in cash flowing assets, we would have the challenge of having more income than investors actually want and if we only had investments that accrued, we wouldn’t be able to pay the investors who want income. As fund managers, it is our job to manage this equation which is why we invest in a variety of current income and accrual deals in our Fund.
Experienced Development Partner
A crucial component to successful private real estate investments is the people we partner with. Aspire’s sponsor is Sherman Associates (Sherman), a reputable industry leading commercial real estate developer based in Minneapolis. We initially tried to be Sherman’s equity partner on Aspire but could not come to terms that worked for both parties, so we structured our capital instead as preferred equity with a fixed rate of return. Sherman has developed more than 8,500 apartment units and has a 35-year track record of real estate execution.
Aspire’s site is located 14 miles north of downtown Denver, a target market we have invested in for more than 12 years, and 17 miles south of Boulder. The property sits within the Downtown Westminster master-planned community, a 105-acre former site of a regional mall, and Sherman was brought in by the city to develop two areas.
Once the master-planned community is complete, Downtown Westminster will feature 2,300 multifamily and condo units, 300 hotel rooms, 2 million square feet of office space, 750,000 square feet of retail and will employ more than 8,000 people. The project is also in walking distance of the future FasTracks commuter rail which will provide direct access to downtown Denver and Boulder.
Today, with real estate market uncertainty remaining coming out of the COVID-19 pandemic, Aspire is a great example of a project that offers attractive returns with limited downside risk. As we continue building the Origin IncomePlus Fund, preferred equity investments provide the best place to position our capital in the near term.