Built in 1972, Common MacArthur is a well-located, 12-unit multifamily building in Oakland, California; its location is only five blocks from the BART station going into San Francisco, requiring a mere seven-minute walk. The property is a quick car ride away from many local attractions: Lake Merritt, UC Berkeley, Napa Valley and hundreds of scenic hiking trails. The asset previously consisted of three- and four-bedroom units, which the owner (in cooperation with the property manager Common) converted to a new and hot asset class called co-living. Common MacArthur took the three- and four-bedroom units that were traditionally rented by the unit and converted to the new model of renting by the bedroom, while providing additional amenities such as designer-furnished living areas and access to Common’s app-based concierge. Also included in rent are utilities, WiFi and common area housecleaning. In an area known for its extremely high rent, the “Common Co-living” model is meant to serve as a partial solution to the affordability crisis for early-career professionals, with each bedroom “unit” and shared bath being leased for 30-35% less than a studio in the immediate neighborhood. The owner was seeking to recoup some of the equity from the Common MacArthur asset reposition to put into the next project.
The client, RIAZ Capital, had originally purchased the property in tough conditions. After deciding to renovate in 2017, rather than approach CBRE for a market-rate refinance request, the client presented CBRE with the challenge to provide financing for a whole different product type: co-living. Knowing that CBRE had its own successful small balance financing division with dedicated experts in the small balance space, RIAZ tasked CBRE to get comfortable hitting the borrower’s required new loan amount, given that the CBRE team, at this time, had virtually zero familiarity with this new co-living space.
The borrower’s existing bank lenders did not want to tackle this type of deal. The client had already decided to go small balance agency because of the non-recourse aspect, typically a little higher leverage and a longer-term fixed rate loan. Unlike CBRE, the regional banks were not able to go out and get ahead, learn the new product type and run the analysis, and therefore had not yet gotten comfortable with co-living.
The real challenge was the operation of co-living. It is attractive for owners and developers in top markets because they could increase gross rents around 30% yet provide a more affordable living space. Since CBRE as a lender had no co-living projects in the East Bay to comp, the question of how to underwrite the deal was a significant challenge.
Even though the deal size was relatively small (12 units), CBRE had to familiarize its credit team and the lender, Fannie Mae, with this new asset class, not only with how to underwrite the deal, but also how to justify the higher rents so that the co-living can be achieved. CBRE had to use the rent premium in order to hit the loan proceeds the client wanted. This was both an internal and external challenge to ensure Fannie Mae was also comfortable with the process.
CBRE was able to go above and beyond to find the solution. The CBRE Capital Markets team strategically engaged CBRE Valuation early in the process to discuss how to value this type of asset, whether on a per-bed or per-unit basis. The appraisal is typically largely based on comps, but because there were no comps to work with, the teams decided to develop a custom approach to complete the valuation.
Additionally, a unique lease structure was formed in order to accommodate the client. CBRE’s underwriters engaged single council to run the lease structure by Fannie Mae council, ensuring all parties were on the same page and comfortable with this new type of deal. Ultimately, CBRE was able to hit the client’s minimum required loan amount at $4.75M, a 67% LTV and a 1.35x debt coverage ratio.
Common MacArthur was the first of Riaz Capital’s small format housing deals and the firm wanted to open the doors to agency debt. They used this smaller deal as their first with Fannie Mae to both gauge the appetite with the agencies and learn from co-living, a narrower product type that has informed their own small format housing prototype, through its partnership with Common. As a result of this first successful deal and getting Fannie Mae on board, RIAZ Capital has developed an urban workforce housing strategy around their prototype: an innovative micro-living product that blends the pricing of co-living with the privacy and simplicity of traditional multifamily architecture. The firm is on pace to raise over $100 million of equity across two funds within the next six months which will contribute to the creation of over 1,500 units over the next three years.
Because CBRE took the time to figure out solutions on the smaller deals for RIAZ, the small balance is now parlaying into much bigger deals, even having gone ground-up on larger co-living assets for which CBRE will provide the Fannie Mae takeout debt. Due to the way CBRE successfully ran the deal and elevated the business relationship, this relatively tiny deal resulted in a huge outcome, even winning RIAZ’s business away from another top competitor. Since closing the Common MacArthur deal, CBRE Capital Markets has three additional RIAZ Capital deals in the pipeline totaling $43 million with Fannie Mae, and another $6 million in the pipeline with its Freddie Mac Small Balance Loan program.