Direct Equity Deal Overview: Monroe Aberdeen
Monroe Aberdeen is a $27 million direct equity real estate investment that is part of the Origin IncomePlus Fund’s portfolio. Of this $27 million, $10 million was secured by a sidecar investment, an opportunity we offer to current Origin investors when a deal requires more equity than we want to allocate to a Fund. The Class A multifamily property sits in the West Loop neighborhood of Chicago and holds 120 condo-quality apartment units. Acquiring Monroe Aberdeen was compelling because of its desirable location, attractive basis, unique product type and available upside.
The West Loop is characterized as one of Chicago’s most in-demand submarkets and is made up of numerous unique, vintage buildings that have since been converted into trendy loft spaces. Catalyzed by the corporate relocations of Google and McDonald’s, the West Loop is experiencing rampant growth with office tenants across all industries flocking to the submarket.
The West Loop is also extremely attractive because of its prominence as a top food and entertainment destination, with some of the most well-regarded celebrity chefs operating restaurants here. Moreover, national retailers, such as Anthropologie and Whole Foods, have chosen to open locations in the area along with smaller labels and trendy brands.
Providing immediate access to Chicago’s major interstate, local rail lines and suburban commuter rails, the location is easily accessible by all parts of the Chicago metropolitan area. The neighborhood has truly transformed into a 24/7 live-work-play environment with a full amenity offering across residential, office, hotel and retail uses. The property is poised to achieve above-market occupancy and rent growth given the explosive growth amongst all product types.
We were one of only three groups invited to bid on this asset off-market due to our deep relationships in Chicago and our proven ability to close deals. Monroe Aberdeen also had an already-existing loan in place with roughly six years of term remaining that had to be assumed with the property, with no ability to increase the leverage due to lender restrictions.
While other firms may rely on higher leverage points and attractive financing terms to make a deal work, our strategy at Origin is to use low leverage when acquiring deals, which enabled us to maintain a sizable advantage over the other bidders, contributing to our ability to acquire this property at an attractive basis for the IncomePlus Fund. When the in-place debt matures, we also have an upside opportunity to refinance the property at more attractive terms.
Unique Product Type
The property is unique within the West Loop market based on both quality and unit mix. The developer spared no expense and the property’s units are true condo-quality with some of the highest-end finishes in the market.
Most new apartments delivered in the West Loop are comprised of one-bedrooms and studios, which sets our property apart. Monroe Aberdeen’s units are 97% two-bedrooms & three-bedrooms and only 3% are one-bedrooms. This unit mix was intentionally designed to cater to the “empty nester” moving to the city from the suburbs, as well as the young family who chooses to rent rather than own.
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The property was also purposely designed with a limited amenity set, such as no pool or fitness center, to target the desired demographic. The lack of amenities allows tenants to only pay for what they use and also lowers our expense ratio and cost of maintenance. In this location, the neighborhood is the amenity and there are several facilities within walking distance of the property for renters who desire a fitness center.
Along with refinancing the property’s loan, additional upside is available by increasing rents to market rates and implementing a monthly fee for the property’s indoor heated parking spaces. The parking fee is expected to be phased in and has been underwritten at the low-end market rate for an attached heated parking spot.
Investing in direct equity like Monroe Aberdeen allows the IncomePlus Fund to take advantage of depreciation and offset most of its taxable income. While today’s market has been impacted by COVID-19, making preferred equity investments more attractive than direct equity today, having the ability to invest in both preferred equity and equity is a unique feature of our IncomePlus Fund. As the economy improves, we can shift back to more direct equity positions, allowing us the flexibility to take advantage of and perform in any market cycle. In the meantime, Monroe Aberdeen is a high-quality asset that we acquired with responsible leverage at a favorable cost basis and has allowed us to maintain a healthy level of occupancy and rent collections, producing a stable income stream during these volatile times.