In an era marked by economic unpredictability, The Alliance Fund emerges as a strategic solution for operators holding high-quality assets. This initiative focuses on partnering with operators boasting a physical occupancy rate surpassing 90%, coupled with minimal economic delinquency among residents. Such a targeted approach not only underscores our commitment to quality but also aligns with our investment ethos.
The Need for Partnership
Investors might ponder why operators with premium, stabilized assets would seek collaboration with The Alliance Fund. This question is not only valid but requires an in-depth examination to understand the underlying complexities and opportunities in the current economic landscape.
Macro-Economic Challenges
The period of 2022-2023 was a testament to economic resilience, marked by the Federal Reserve’s unprecedented action of increasing the benchmark interest rate 11 times. This move, aimed at tempering rampant inflation, had significant repercussions for operators, particularly in the realm of increased debt service due to the hiked interest rates.
Understanding Rate Cap Policies
In anticipation of fluctuating interest rates, savvy operators opted for “rate cap” policies, a form of insurance for their floating-rate loans. While these policies, predominantly chosen for 1-3 year durations, provided a temporary reprieve, their looming expiration now presents a financial quandary. Renewing these policies in the current economic climate demands substantial investment, a stark contrast to their initial affordable outlay.
The Financial Domino Effect
The efficacy of rate caps is conditional, activating only when interest rates surpass a predetermined threshold. For instance, a rate cap set at 2% for a 3% loan interest rate only becomes effective if interest rates climb above 5%. This increment, although seemingly modest, can significantly strain operators’ cash flows, leading to reduced or even negative returns due to escalated debt service demands.
Two years into the Federal Reserve’s aggressive rate hikes, the operational reserves of numerous operators are critically depleted. The imminent expiration of their rate caps in 2024 further exacerbates the situation, posing a formidable challenge in the absence of adequate funds for renewal.
The Alliance Fund’s Strategic Intervention
To navigate this complex financial landscape, operators of prime, stable assets are increasingly turning towards partnerships with entities like The Alliance Fund. As a preferred equity group, we offer vital financial support, enabling these operators to extend their rate caps and effectively weather the economic challenges posed by the Federal Reserve’s policies.
Our Investment Philosophy
The Alliance Fund, currently open for new investors, projects an attractive return rate exceeding 20%. Our investment strategy is meticulously crafted, focusing on securing a priority position in the equity cap table, aiming for mid- teen preferred returns, and obtaining a General Partner (GP) stake in multiple assets. This multifaceted approach is designed to comprehensively protect against the downside risks inherent in such investments.
Active Deal Review and Investment Opportunities
Our dedicated team is currently engaged in the active review of potential deals. In recent weeks, we have extended term sheets to various operators, indicative of our proactive approach in this sector. To realize these opportunities, we are inviting new investors to join our fund. With a fundraising target of $25 million, we offer a unique opportunity for investors to contribute alongside us. Notably, the GP is significantly invested in this offering, committing over $500,000, which signifies our confidence and alignment with our investor community.
Engagement with Prospective Investors: Addressing Common Questions
In our interactions with potential investors, we have identified several recurrent questions:
1. Distribution of Preferred Returns:
The fund does not anticipate cash flows during the initial holding period. Distributions are slated to begin following the sale of the first asset, estimated within 1-3 years post-fund inception.
2. Depreciation Benefits: Investors can avail themselves of depreciation deductions, enhancing the overall investment attractiveness.
3. Investment Focus: While our primary focus remains on multifamily assets, the fund is open to exploring alternative asset classes as viable investment opportunities.
4. Asset Disclosure: Owing to the sensitive nature of our negotiations, detailed asset information will remain confidential until actual fund investment. However, investors can request information on current fund investments.
5. Valuation and Equity Security:
The fund is committed to ensuring that valuations encompass both the outstanding loan balance and our equity contributions.
6. Operational Oversight and GP Stake:
Should there be any deviation from expected performance by operators, the fund reserves the right to intervene and assume operational control, safeguarding our equity investments.
7. Management Duties: Our team will oversee asset management responsibilities, ensuring the security and growth of our investments.
8. Minimum Investment Threshold: The fund has set a minimum investment bar at $50,000, making it accessible to a broad range of investors.
If you have any further questions, please reach out to us. We are working hard to secure the next investment for this fund and have spots available for you to join us on this opportunity. This type of investment does not happen very often and once it is full we will be closing it down to new investments.
