Menlo Gate, LLC Offering Letter
We have been monitoring the Bay Area real estate market closely. Demand for Redwood City rental housing is higher than ever before. Although new construction continues to dot the Redwood City skyline, much is for office and retail. Accordingly, the Mid-Peninsula’s housing shortage continues to impact rental prices in the area. At the same time, market inventory for multi-family housing continues to be historically low. The majority of rental property transactions are conducted off-market. Sellers are actively engaging in up leg IRC 1031 transactions and trading up their portfolios. Sellers are picking their transaction partners very carefully and choosing to sell their properties through broker relationships as opposed to the MLS. As a result, very few properties are actually making it to market. This, in turn, has continued to drive prices up.
The Mid-Peninsula, as we have all seen, continues to undergo a complete metamorphosis. The Redwood City downtown area has physically changed its landscape and scheduled construction continues to impact all sectors of the Redwood City market including, but not limited to, residential, multi-family, retail, and office.
Further, Menlo Park’s Marsh Road to Willow Road, Facebook Corridor, is literally changing from day to day. Multiple projects currently completed or under construction include the Menlo Gateway office building, Niko Hotel, a new fitness center, and Facebooks newest Bayshore office building, Willow Road overpass widening, and so on. The new Mid-Peninsula Housing project on Willow Road was recently brought to market. Further, Sequoia’s 777 Hamilton is now complete and has been brought to market. The only word to describe this change to the Mid-Peninsula landscape is “metamorphosis.” The wave is building to a crescendo and this offering group is designed to capture significant upside appreciation.
The New Stanford Campus:
Add to this the addition of the new Stanford University Campus on Bay Street in Redwood City. Initially, some 2,400 employees will work on the site of the former Mid-Point Technology Park off Highway 101, about 5 miles from the main campus. The new campus will initially develop 21 of the 35 available acres. It will feature modern offices, a fitness center and pool, a town square and a park, among other amenities. Stanford has also agreed to pay for the installation of a new public transport trolley that will service the new campus and the Fair Oaks District of Redwood City. The new trolley will allow easy access from the Fair Oaks District to the vibrant Redwood City Downtown corridor. Groundbreaking has commenced, pads have been poured, and construction is underway.
The New Facebook Campus:
Facebook is expanding again. It’s been just over two years since Facebook moved into its 430,000- square-foot, headquarters in Menlo Park, Calif. Now the company is ready to expand again, and this time it wants to build a lot more than just office space for its workers. Plans have been approved for Facebook’s construction of what it will call its “Willow Campus,” a “mixed-use village” that sounds like a combination of a strip mall, a condo complex and an office park. The new campus, which will be right behind Facebook’s existing headquarters in Menlo Park on a site the company acquired in 2015, will include office, retail, a grocery store, a pharmacy, and much more. All of this will be open to the public, according to the company’s blog post. There will be 125,000 square feet of retail space in total, and
1.75 million square feet of office space. A Facebook spokesperson announced that the new Willow Campus project will be completed by 2021. This campus will be in addition to the company’s existing office space, not a replacement for it.
Bohannon Park Development:
The Bohannon Company has nearly completed construction of the new Menlo Gateway, an eight-story, 210,000-square-foot office building in Menlo Park. The mixed-use project also consists of a 1,040-space parking structure and a 41,000-square-foot fitness center. This property is located adjacent to the construction of a new hotel along the 101 corridor in Menlo Park. “The supply-constrained Menlo Park office market, combined with demographic and economic tailwinds, provide exceptional fundamentals for a project of this scale and quality,” Michael Mestel, Square Mile’ principal, said in a press release. “In addition, The Bohannon Cos. has been at the forefront of real estate development in Silicon Valley for over 80 years. We are excited to provide financing for the creation of an iconic office building in an irreplaceable location, backing an established developer with a history of success.” The project is part
of the first phase of Menlo Gateway, a 16-acre master-planned development comprised of a 250-room Autograph Collection hotel currently under construction and a total of approximately 500,000 square feet of office space to be built in phases. Located at 100 Independence Drive, the office building capitalizes on the site’s excellent visibility from the highway and is oriented to maximize southern exposure and natural light. Menlo Park is known as a hub for high technology and attracts many of the nation’s most prominent technology and venture capital firms, including Intuit, SRI International, TE Corporation, Andreessen Horowitz, and Sequoia Capital. A second phase of the Menlo Gateway project will include two additional office buildings, a café/restaurant, as well as neighborhood retail and community facilities, all totaling roughly 500,000 square feet of space.
Redwood City Opportunity Zones
Governor Brown recently declared two census tracks and multiple zones in Redwood City, CA as “opportunity zones.” These zones include portions of Friendly Acres, Redwood Village, Stambaugh- Heller and North Fair Oaks. The federal tax bill that passed in December requires governors to nominate up to 25 percent of census tracks for opportunity zone designation. Those census tracks must have median family incomes of no more than 80 percent of statewide or metropolitan area family income, according to a staff report.
Menlo Gate Group 18 is located within the Fair Oaks zone and walking distance to the others. The purpose of the “opportunity zone” bill is to spawn reinvestment in these areas. It is anticipated that the tax incentives offered by the “opportunity zone” bill will lead to significant reinvestment in these areas. Although Menlo Gate Group 18 will not be qualified as an “opportunity zone” investment, it is designed to take advantage of the appreciation that will ensue from reinvestment in these areas as a result of the “opportunity zone” legislation.
A Unique 15 Unit Apartment Opportunity Centrally Located In Redwood City’s
Newest Rising Rental Market:
Menlo Gate has been actively pursuing leads and off market opportunities within the Mid-Peninsula rental market. Needless to say, there are limited opportunities in this area and the majority of properties are sold off market as portfolio owners continue to search for upleg 1031 opportunities.
The company’s efforts continue to pay dividends. Menlo Gate, LLC has locked down a fantastic opportunity for its participants, a 15 unit apartment opportunity located in the heart of one of Redwood City’s premier rising rental markets. If you follow the Redwood City rental market closely, you are aware of the redevelopment corridors that are taking place in both the Fair Oaks District and Redwood Village. These redevelopment corridors were initially driven by the new Stanford Campus project in Redwood City. It is anticipated that they will continue to be driven by the new “opportunity zone” designation. Any larger parcel properties in these areas are being acquired by portfolio owners. Menlo Gate has locked down what we consider to be a phenomenal opportunity, adjacent to the Redwood Village and Fair Oaks “opportunity zones,” directly off Middlefield Road. We now take the opportunity to present this Redwood City opportunity to our participants.
We have prepared and attached draft pro forma financials for Menlo Gate's next Offering Group for a 15 unit apartment opportunity located in Redwood City, CA. This offering consists of a 15 unit, pride of ownership, apartment building, located in Redwood City’s rising rental market. Further, the property is located within walking distance to the new Stanford Campus, Costco, and the thriving downtown of Redwood City. The building also provides easy access to the HWY 280 and 101 commute corridors.
This opportunity came to us through our network. The seller is in a 1031 upleg transaction. He originally listed the building at $5.6M and the building went into contract. The buyer, however, was unable to qualify and remove the financing contingency. The seller now needed to close quickly in order to consummate his 1031 transaction. At the close of negotiations, we were able to enter into contract with the seller for a contract price of $5,050,000. This equates to an acquisition price of $336K per door-approximately $75K per door under market.
560 Charter St.
560 Charter St., Third Floor, Balcony
560 Charter St., Two Bedroom Floor Plan
560 Charter St., Bathroom
A review of local comparable listings and sales reveals that this Menlo Gate Offering Group provides for captured equity in the range of $1,125,000. There are multiple closed transactions in Redwood City for well above this per door price in far less desirable locations. The majority of comparable sales in this area are anywhere from $400K to $425K per door, as opposed to the contract acquisition price of $336K per door.
Over the last year, we have seen the Bay Area rental market escalate rapidly with very low levels of multi-family properties on the market. Very few owners are bringing their assets to market. There is simply no incentive for owners to transact as they have watched their rent rolls swell. Further, real estate analysts and prognosticators have estimated that vacancies will dip below 4% nationally this year. Vacancy levels are expected to be even tighter in the Bay Area and especially on the mid- Peninsula. As vacancy rates decline, it is estimated that rents will climb as high as 5% year to year over the next three years. Therefore, we have seen a tightening of the multi-family market as owners take advantage of low interest rates and position themselves for the long term hold. Simply put, Redwood City rental real estate continues to be the darling of the real estate industry and prices are escalating rapidly.
Pro Forma Financials and Assumptions:
The attached pro forma financials for the building necessarily incorporate certain assumptions that
are typical in the context of forecasting valuations for real estate investments. These assumptions are overviewed below and should be kept in mind while reviewing the attached pro forma financials.
Comparable Sales and Captured Equity:
The average rent for an apartment in San Mateo County is $3,250, a 6% increase compared to 2018, when the average rent was $3,057. (see (https://www.rentcafe.com/average-rent-market-trends/us/ca/san-mateo-county/san-mateo/) Escalating rents have translated into rising per door prices for multi-family acquisitions as net operating incomes have risen due to higher rental values. The company believes that it has acquired the subject property significantly under market due to seller’s desire to complete his upleg 1031 transaction. This translates into captured equity for the investors. The company conservatively estimates captured equity range of approximately $1,125,000 for this acquisition.
Rental Value:
The property consists of fifteen units in West Redwood City, CA, close to Alameda de las Pulgas. In total, there are 9, one bedroom units, 2 two bedroom units, and four studio apartments. One studio unit is unwarranted and not part of the original construction. This unit, however, has been rented out to a Federal housing assistance program without incident for a period of years. Further, we have walked the unit and it has more than sufficient ingress and egress to meet housing construction and safety needs. There is also a beautiful on-site laundry room that brings in additional income. Based on similarly situated buildings in this location, Menlo Gate estimates a fair market rental rate for each one bedroom unit of $2,150, $2,850 for the two bedroom units, and $1,850 for the studio apartments. These rents are estimated at present market. The Company owns and manages units in these areas and is currently receiving these rents. Based on the rental estimates above, we have run the attached pro forma financials at a combined annual rent of $389,400. We conservatively estimate fair market annual rental increases of 5%. The financials also reflect an equivalent vacancy rate for a one bedroom unit going vacant for three months ($7,500). For the record, we generally do not see units go vacant for more than a month, even in the worst of times.
Further, there is a coin-operated laundry facility in a separate laundry room at the property. The laundry room has a pair of machines set at fair market rates for laundry. We have estimated a conservative monthly income of $300 per month, or $3,600 annual, from the coin-operated
laundry. Moreover, we have added an income line of $30 per unit/per month ($450 monthly/$5,400 annual) for the recovery of utility costs from tenants through Ratio Utility Billing Systems
(“RUBS”). RUBS allows the company to recover pro-rated utility (i.e. water and sewer charges) from the tenants based upon occupancy and use.
Financing: We will be placing a loan on this property with approximately 50% leverage. This offering is in conjunction with the 1031 sale and trade up of additional Menlo Gate, LLC properties.
Accordingly, additional Menlo Gate, LLC’s buildings are actively listed. Menlo Gate will “trade up”
$1.5M from these sales into this Menlo Gate offering group through a 1031 transaction. These funds represent approximately one-half of this offering. The remaining one-half of the funds will be raised through this offering. We are in discussions with our preferred lenders for the acquisition of this property. We currently have a Letter of Intent at or around 3.8%, fixed for 7 years. The pro forma financials reflect these financing rates and terms.
Repairs: Pursuant to our walk-through inspection, the building is in excellent condition. All units are standardized in their modernization. There is limited deferred maintenance. Any foreseen repairs would be to units during turnovers to modernize the units. These property improvements, however, will be paid for using either tenant deposit withholdings or the cash flow from the property that is discussed further below. The repairs will be performed during tenant turnovers or at the discretion of the management. The pro forma financials also incorporate an annual repair expenditure of $9,000 per year for maintenance of the property. Although we do not expect to require this amount in annual maintenance for the property, this amount is incorporated to insure that the pro forma financials reflect a conservative approach for the participant.
Expected Sales Price: We have calculated the appreciation for the property at 5% over the next seven years. For those of us that follow the Bay Area market closely, this is a conservative number based upon the timing of the acquisition and the proximity of the building to Downtown Redwood City, Facebook, Google, and the Stanford Campus. Based on this calculation, the property has a resale value of over $7,035,502 after seven years at 5% appreciation. Accordingly, the estimated appreciation for this property is estimated at $1,985,502. The appreciation for the property over seven years may exceed or fall short of this number. The estimated appreciation rate, however, represents a conservative number for the appreciation of Bay Area real estate. The expected sales price based upon appreciation is also calculated using the contracted for purchase price of $5,050,000 which we believe to be an "under market" value for this property. The figures represented in the pro forma financials are dependent upon risk factors overviewed in the private placement memorandum located at Menlo Gate's website.
Cash Flow: Based upon the pro forma financials, the property has an estimated initial cash flow of approximately $81,900 per year (see Cash Flow Before Tax), or $837,161.00 over the seven year holding period. This is due, in part, to the anticipated down payment of over $2,500,000 for the property from the instant offering and the 1031 funds from the capital pool arising from sale of additional Menlo Gate, LLC properties 1 as well as the ability to capitalize on attractive financing rates below 5% for this transaction. Accordingly, it is anticipated that there will be distributions to the each Full Share member over the period of ownership of approximately $119,594 per member (this calculation includes the company’s carried interest distribution and property management fees). This provides the investor with an approximate 12.30% return on investment without appreciation at a 4.68% capitalization rate. These figures represent estimated returns based upon the pro forma financials and are dependent upon the risk factors overviewed in the private placement memorandum located at Menlo Gate's website. As always, we are here to help and are available to answer any questions you may have following your review of the attached pro forma financials. We also encourage all potential members to seek the independent advice of their tax consultant, attorney, or accountant regarding this or any significant investment. It is our goal to provide each investor with a conservative investment vehicle that takes advantage of the leveraged rates of return of real estate.
This offering is limited to a $1.5M raise. Based upon participant submissions of Menlo Gate Participant Subscription Reservations, $700K has already been placed and only $800,000 is remaining for placement. This final allotment will be taken on a first come, first served basis. Placements can be made in $31,250, $62,500, $125K or $250K increments.
Proceeds from the sale of additional Menlo Gate, LLC properties will net effective “upleg” profits in excess of $2M. Certain members from these groups have elected to participate in 1031 “upleg” opportunities. Their funds will be placed into this group pursuant to their election. The instant Menlo Gate offering will raise an additional $1.5M to fully capitalize this group with a loan to value ratio of approximately 50/50.
Subsequent to Menlo Gate, LLC's receipt of confirmation of full conscription, this group will be closed.
We look forward to hearing from you and thank you very much for your continued support of Menlo Gate.
Sincerely,
Jesshill E. Love
John J. Conlon
Real Estate Investing For The Rest Of Us
Menlo Gate, LLC
2995 Woodside Rd.
Suite 400
Woodside, CA 94062