3650 REIT carves out niche in large-scale multifamily deals

The firm made an $89m preferred equity investment in a $534m portfolio.

3650 REIT has identified what it believes is a niche in the multifamily market, originating preferred equity to finance large-scale portfolio acquisitions.

The firm last month closed a five-year, $89 million preferred equity investment on behalf of RREAF Holdings, which is acquiring a three-tranche, 4,000-unit portfolio of apartment properties in the Sunbelt for roughly $534 million.

This is the second time this year that 3650 REIT has participated in a transaction like this, with a third in the pipeline, Jonathan Roth, managing partner and co-founder, told Real Estate Capital USA. “We are finding that there is real opportunity in the multifamily sector to be able to provide a subordinate piece of the capital stack for large portfolios,” he added.

There are only a handful of investors that have been pre-approved by Fannie Mae and Freddie Mac that can fill this position in the capital stack on multifamily deals where the agencies are funding senior mortgages. “The agencies are very careful about their underwriting and that is why, during times of distress, they have had very few defaults and almost no foreclosures,” Roth added.

The Falls at Spring Creek (Source: 3650 REIT)

The deal was a complex one, with the sponsor aggregating the portfolio from three sellers. “It’s hard to find portfolio acquisitions because everyone is chasing them,” Roth said.

3650 REIT sourced the opportunity via a long-term relationship that Michael Fleischer, its director of originations, had with RREAF. 3650 REIT originated the investment as part of its bridge- and event-driven investment strategy that is designed for real estate that is in some state of transition and the sponsor is planning to upgrade the properties. “These are good assets that can be made a little better with a little love, like upgrades in the kitchens, bathrooms and common areas,” Roth said.

As an investor, 3650 REIT was attracted to several aspects of the transaction. First, the sponsor proved itself to be an outstanding operator that has also built its own management company. “We scrutinized that extensively and they came out with flying colors,” Roth said. “The sponsor showed us that they are very capable of owning and operating multifamily assets.”

Additionally, the properties are 96 percent occupied and all fared well during the covid-19 pandemic. Finally, the size of the portfolio means that the sponsor will benefit from the scale of the properties.

3650 REIT did a deep dive on each asset to get a better understanding of the properties, their locations and geographies, and to test the sponsor’s assumptions around being able to renovate the properties and grow the rents. “Even if you improve the assets, it’s not a guarantee that this will make the expenditures worthwhile,” Roth said.

DLP Capital has also provided am equity investment. Berkadia, which arranged the financing, said that it explored many avenues for financing, including a single-borrower CMBS deal and other structured loans from investment banks. But at the end of the day, Freddie Mac and 3650 REIT were the best choice for the sponsor, which obtained 21 individual loans totaling $406 million, said Nathan Stone, a managing director at Berkadia Dallas.