Snowman Strategy

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Strategy Synopsis:

For most real estate syndications, the liquidity event is the sale of the property at the end of the holding period. After managing expenses well and implementing value add propositions to increase rents and raising the net operating income, the property is sold for the upside in appreciation. However, given that risk is well managed, using a refinance as the liquidity event allows for Snowman to return the majority or all of the investor's principal, which eliminates risk for the investor, but still hold on to the property for continued cashflow and appreciation. The property takes on a new loan and continues to operate, paying off principle and generating cash flow over the rest of the loan's lifetime. Investors are able to receive checks for as long as Snowman holds on to the property, which can be years to come! Investors will receive preferred returns up until the year of refinance, which ideally returns all of their capital. Investors also continue to receive tax benefits proportional to their equity position from their initial investment. If not, the investor will be paid until all deficiencies have been accounted for, with the cash flow thereafter for both scenarios being split between the General Partner and Limited Partner on agreed upon terms. 

Investor Profile:

This strategy is suited for investors that are looking for consistent cash flow for an extended amount of time rather than a 1.4x - 2.0x multiple in 2 - 5 years. The Perpetuity model are holds for as long as 30 years, but investor risk is eliminated in between year 3 - 5, when a refinance returns the initial principle invested. 

Strategy Strengths:

Within a lifecycle of a multifamily property, every 10 - 15 years, is when many of the structural integrity of the building require attention, maintenance, and/or replacement. For 30 year loans, these 10 - 15 year time marks are also when a chunk of equity have also been accumulated. On properties and neighborhoods where Snowman considers the perpetuity model, these are properties that are in neighborhoods usually a class tier above the actual property and are in high population and job growth regions. While the underwriting assumes standard cap rate expansions, reality often reveals that these neighborhoods and their assets will experience cap rate compression. When those characteristics are also paired with strong rent growths, the appreciation and increased NOI is able to consistently allow for re-finances to not only address the exterior and interior maintenance, but also return bonus paychecks to investors. The sale of the property also returns cash to investors and their families.  

Strategy Risks:

Interest Rate Risks is the greatest threat to the Perpetuity Model, where the initial return of principle investment and subsequent re-finance cash outs for repairs but also investor distributions hinges on interest rate. If the rates at the time of re-finance are too high, equity can be trapped because electing to continue with the re-finance will drastically increase the interest expense to a level where cash flow might become flat or even negative. The 2022 - 2023 Fed Interest Rate Cycle saw the great Cap Rate Expansion in the history of the United States not seen for almost half a millennium, which blindsided many investors and firms. But with conservative modeling and projections, Snowman is confident that safety measures are in place to protect investor equity and investor cash flow even during the most turbulent markets.

Strategy Synopsis:

For a more traditional strategy, the liquidity event is the sale of the property at the end of the holding period, which can be as short as 2 years or at most 6. Depending on the market and the length of the hold, the equity multiple is usually between 1.4x and 2.0x, a combined amount of the cash flow and sale appreciation. Such a strategy is more in line with a classical buy, renovate, and sell, where renovations and value add increases the value of the property and investors gain the appreciation from increased NOI. Investors receive preferred return until the date of sale, and take part in gaining from the appreciation proportional to their initial equity investment.

Investor Profile:

This strategy is suited for investors that are looking for a 2 - 6 year time frame turn around for their investments, earning usually between a 1.4x and 2.0x multiple after the property is sold. 

Strategy Strengths:

Returning a larger amount of capital after the liquidity event allows investors to consider their options and explore or diversify what they want they might want to invest in next. The tax advantages allow for the investor to pocket the cash flow during the hold almost tax free and Snowman's sale of the property is often followed up by a 1031 Exchange that defers the investor's taxes gained from appreciation. 

Strategy Risks:

While the risk is not specific to the real estate industry or the traditional model, it holds true that the ability to execute on the sale of the property hinges upon the timing of the market and whether it is advantageous to sale. In a slower moving market where interest rates are high and buying demand is weak due to a higher cost to gather equity or borrow debt, it may be difficult to sell the property and return capital back to the investors. Such conditions may force Snowman to hold on to the property for a period of time beyond expectations, but there is often minimal impact on the returns as investors will continue to cashflow.