In March 2017, Vukota Capital Management launched an offering for a 235-unit multifamily property in Denver, Colorado.
At the time of acquisition, the property had recently undergone a significant renovation and repositioning by the previous owner, with approximately $2.2 million spent on exterior and interior improvements. Approximately 61% of the units had been renovated.
The business plan contemplated adding additional revenue through a market-supported value-add program. Vukota planned to spend approximately $6,500/unit upgrading a portion of the remaining unrenovated units and achieving average monthly rent premiums of $125. The renovation plan included new vinyl plank flooring, black GE appliances, new hardware (faucets/lighting), resurfaced countertops and fireplace surrounds, and two-tone paint.
Challenges Early On
Early on, Vukota reported challenges with operating expenses exceeding budget and declining occupancy as a result of higher-than-expected turnover. As of Q4 2017, occupancy had declined from 93.5% to 85.6% and only six units had been renovated, averaging $110 monthly rent premiums over previous in-place rents.
Renovations were not proceeding as quickly as expected and at the end of 2018, only 25 units had been renovated. Higher-than-anticipated operating expenses had also continued, most recently due to staffing challenges at the property. Due to a saturated and competitive market, as well as the inability to renovate and re-lease units as quickly as originally planned, the property was put under contract. However, in Q1 2019, the contract to sell was terminated due to price reduction requests from the buyer. Instead, Vukota decided it would continue focusing on leasing efforts and improving operations and subsequently re-evaluate listing the property for sale later in the year.
While continuing to lag originally forecasted figures, Q3 2019 saw improved performance over the previous two quarters with occupancy increasing to 94% and debt service coverage ratio (DSCR) increasing to 1.7x. The property was listed for sale once again in late 2019. Vukota received multiple bids and the sale transaction closed in January 2020.
A saturated and competitive submarket, combined with lack of execution and failure to fully implement the originally planned value-add program forced Vukota to deviate from the business plan and exit the investment approximately seven years earlier than planned, achieving lower-than-projected returns for investors.
*Net of the most onerous fees charged to clients of CrowdStreet Advisors, LLC, our registered investment advisor subsidiary; an investor’s actual returns on a realized investment may differ.
This report contains explanations of a series of events associated with the Torrey Pines Apartment Homes offering that resulted in an approximate 9.2% (net of most onerous fees) IRR to investors (including those from the CrowdStreet Marketplace). Certain aspects of the report such as dates of major events and the final outcome are easily verifiable while others, particularly underlying reasons behind the sponsor’s business plan execution, are not.
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