506(c) Verification Requirements

Millennium Dallas, Dallas, TX

Hope you had a good weekend and are refreshed for another busy week ahead. Let’s dive into the latest from Freddie Mac as well as getting into the distinction between Rule 506 (c) Verification Requirements and 506 (b) Requirements for accreditation. 

LENDER RESERVE REQUIREMENTS LOWERED

Last week Freddie Mac announced the removal of most of the measures put in place last year during the pandemic that had reflected the uncertainty in the market.  Among those were higher spreads, increased debt service coverage ratios, and much larger reserve balances.  We were primarily glad to see the reduction of up to 18 months of debt service, taxes, and insurance (which could reach into the millions!).  While the underwriting metrics remain fairly strict, this is a welcome sign that the economy is strengthening. 

RULE 506(c) VERIFICATION REQUIREMENTS

We had a few follow up questions around the accredited investor verification change that I mentioned previously, so I thought it warranted some clarification. We utilize the Rule 506(c) exemption for our offerings which permits us to solicit and advertise an offering to accredited investors only. In contrast, Rule 506(b) does not allow for general solicitation. However, as you know, Rule 506(c) requires us to take reasonable steps to verify that our investors are in fact accredited investors. The SEC framework currently provides a principles-based method for verification as well as a non-exhaustive list of verification methods that are used in verifying the accredited investor status of natural person purchasers.

With these recent amendments of March 15, 2021, and in order to reduce the cost and burden associated with this verification, we are now permitted to establish that an investor that was previously verified can be re-verified as of the time of a subsequent investment. That is, if the investor provides: (i) a written representation that the investor continues to qualify as an accredited investor; (ii) the issuer is not aware of information to the contrary; and (iii) the prior verification was conducted within the last five (5) years. 

Good news for those of you who have already invested with us!  No more hassle to get re-verified every 90 days like we used to go through.   Hope that helps clarify and look forward to seeing everyone on the next deal. 

DEALS

Speaking of deals – we’re pushing hard for our next target opportunity.  Of the offers we made last week for off- market deals (they’re really not off-market, more like pocket listings), both ended up going under contract at prices that pushed yields down to 8% COC and 13% IRR.  Not too far off but something that has given me pause to consider whether we may need to adjust our expectations a little.  Personally, I would rather present lower returns on a deal that still maintains conservative underwriting than try to push numbers higher with super aggressive underwriting.  Reminds me of lipstick on a pig! Food for thought as we move forward. 

As I close this, please forgive me for doing a little bragging on our amazing teams.  As we were reviewing our April financial reports last week, I did some quick calculations on how our deals are looking.  Based on current NOI at a market cap rate, we’ve generated some pretty impressive value add:

• Cincinnati, OH - purchased $15MM, value today $25MM – $10MM increased value in 1 year! 
• Oakwood, GA - purchased $14MM, value today $18MM – $4MM increased value in 1 year! 
• Shreveport, LA – revenue increased 67% and NOI increased $105k/month in 9 months! 
• Dallas, TX - purchased $17MM, value today $24MM – $7MM increased value in 2 years! 
• North Augusta, SC - purchased $8MM, value today $9MM – $1MM increased value in 6 months! 

And these are just some highlights…hats off to the team! 

Talk soon and trust you’ll have a great week!