A Unique 10 Unit Apartment Value-Add Acquisition Opportunity Centrally Located within Menlo Park’s New Development Pocket:

Menlo Gate has been actively pursuing leads and off market opportunities within the Stanford-Facebook-Bohanon development pocket.  Needless to say, there are limited opportunities in this area and many properties are sold with a development premium.  Many sellers are aware of the new developments and are asking prices which include what we refer to as a “new development premium.”

The company’s efforts continue to pay dividends.  Menlo Gate, LLC has locked down a fantastic opportunity for its participants, a 10 unit apartment opportunity located in the heart of the three Stanford-Facebook-Bohanon developments in the thriving community of Menlo Park.  Based on the addition of the new Stanford Campus, proximity to the new Facebook and Bohanon developments, implementation of new zoning laws, and a Fair Oaks trolley system, we believe this area of Menlo Park will be one of the highest appreciating district in all of San Mateo County over the next 5 years.

We have prepared and attached draft pro forma financials for Menlo Gate’s next Offering Group for a 10 unit apartment opportunity located in Menlo Park, CA.  This offering consists of two 5 unit buildings that are located on contiguous parcels.  Further, the property is located within walking distance to the new Stanford campus and the Facebook and Bohanon developments.  The property also provides for easy access to the local up and coming downtown of Redwood City.

This is an off-market transaction that has come to us through our network.  The seller is engaged in a trade up IRC 1031 transaction and wants to ensure that the timeline is controlled.  Accordingly, the seller brought this offer to Menlo Gate at a very attractive sales price in order to ensure that the deal would go through without any issues.  At the close of negotiations, we were able to enter into contract with the seller for an extremely below market contract price of $346K per door.

A review of local comparable listings and sales reveals that this Menlo Gate Offering Group provides for captured equity in the range of $400,000 to $500,000.  There are multiple closed transactions in Menlo Park well above this per door price in far less desirable locations.

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 10% year to year for 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 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 in the course of reviewing the attached pro forma financials.

Comparable Sales And Captured Equity

The average market rent for a one-bedroom apartment in San Mateo County is $2,959 per month, up from $2,572 in 2016, according to new rental data released by the San Mateo County Department of Housing (see https://www.rentjungle.com/average-rent-in-san-mateo-rent-trends.)  This reflects a 15 percent increase from last year.  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 1031 transaction and desire to control his sale/replacement property transaction.  This translates into captured equity for the investors.  The company conservatively estimates captured equity range of $400,000 to $500,000.

Rental Value

The property consists of 8 one-bedroom units and 2 two-bedroom in Menlo Park, CA adjacent to the new Stanford campus, Facebook Willow Campus, and the new Bohanon Park development.  All units are permitted as part of the original construction, there are no unwarranted units.  All units are presently rented at a below average rental rate.  Based on similarly situated buildings in this location, Menlo Gate estimates that there is a significant upside in rents for this location.  Further, this will increase as the new developments referenced herein are brought to completion and market demand for housing in this area increases.  The Company owns and manages units in this area and is currently receiving rents of $1900 for one-bedrooms and $2750 for two-bedrooms. Based on the rental estimates above, we have run the attached pro forma financials at a combined annual rent of $248,400.  We conservatively estimate a conservative annual rental increase of 5%. The financials also reflect an equivalent vacancy rate for a one bedroom unit going vacant for two months (2.5% vacancy rate). 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 monthly income of $200 per month, or $2,400 annual, from the coin-operated laundry.  Moreover, we have added an income line of $50 per unit/per month 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.  This equates to an additional $3,600 in RUBS income.

Financing

The property is being acquired with a seven year fixed product from one of the company’s portfolio lenders.  Due to Menlo Gate’s operational history and relationship with this lender, we have received a Letter of Intent for this acquisition at 3.50%. The pro forma financials reflect present financing rates and terms at 3.5% for the seven year hold term.

Repairs

Pursuant to our walk through inspection, the building appears to be in structurally 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 $8,400 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 in order 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 much anticipated  delivery to market of the new Stanford Campus, Facebook Willow Campus, and Bohanon Park development.  Based on this calculation, the property has a resale value of over $4,784,141.00 after seven years at 5% appreciation.  Accordingly, the estimated appreciation for this property is estimated at $1,384,141.  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 $3,400,000 which we believe to be a significantly “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 cash flow of approximately $72,350.00 (see Cash Flow Before Tax) during the first year of operation.  This provides the investor with an approximate 5.23 % cash on cash return on investment at a 5.36% capitalization rate. The total estimated cash flow over the seven year holding period is $583,002.  This number incorporates rent escalation which necessarily increases the projected distribution per investor over the holding period.  (See Pro Forma, Page 7, Long Term Financial Forecast, Total, Cash Flow After Taxes.)  Accordingly, it is anticipated that there will be distributions to the each Full Share member over the period of ownership of approximately $83,286.00 (this calculation includes the company’s carried interest distribution). This is due, in part, to the down payment of $1,360,000 for the property from the Menlo Gate Group Fourteen capital pool and the ability to capitalize on the beneficial financing rates for this transaction.  These figures do not account for asset appreciation attributable to the investment.  The internal rate of return on investment with appreciation with these assumptions is 14.80% per participant.  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.