Rancho Cordova – Asset Update

As of April 19th, 2024

We would like to provide you with a comprehensive update regarding the Vivo Rancho Cordova asset. 

The asset received temporary certificate of occupancy for the main building (which allows us to long term lease all units along with full usage of the common areas) this last week. The certificate of occupancy for the entire property is anticipated to be approved by the end of April, one month behind the re-underwritten expectations as outlined in the recent capital call memo to investors.   

As previously reported, the co-managers decided to transition the property management from Vivo to Apartment Management Consultant (“AMC”) in December of 2023. AMC is ready to ramp up marketing and leasing efforts now that the apartment amenities are available and accessible to all tenants. As of the latest leasing report, the asset’s occupancy is 14% compared to 23% in the reforecast analysis for March 2024. AMC will remain focused on leasing units at proforma rental rates and stabilizing operations.  

We called capital in September 2023 and February 2024 to replenish the interest reserve account, fund operating shortfalls, cover additional construction costs and pay back lines of credit Fairway Vivo GP Fund had made to the project on a short-term basis. We raised 72% of the total additional capital called to fund the uses outlined in each capital call and that we believe will be required to stabilize the asset. Given the capital call shortfall, we will now begin raising the additional remaining capital required, first from the participating investors and then from outside parties, as the uses are still needed.  

After a thorough review of the capital call reforecast analysis in February 2024, we still believe the estimated gross sales price at a disposition in July 2025, if achieved, will yield a return of capital to investors, including the additional capital called for by the notices. As previously stated in the capital call notice, the targeted returns are based on a reforecast underwriting that was conducted using the best information we had at that point in time. Markets are exceptionally fluid right now, rendering any projection challenging to pin to a knowable outcome. 

We remain committed to maximizing your investment’s outcome. However, not every asset in our Vivo portfolio is in a similar condition. We’re experiencing significant challenges on other Vivo assets. For more in-depth insight into those challenges and our approach to navigating the Vivo portfolio, we encourage you to read our CEO’s letter.  

Rancho Cordova – Asset Update

As of January 16th, 2024

We’ve made a change to the property management at the Vivo Rancho Cordova asset. Last month, the property management transitioned from Vivo to Apartment Management Consultants (“AMC”).  AMC is a true 3rd party management company that has been in the residential property business for 24 years. Their primary objectives are to improve operational efficiency and lease the remaining vacant units.  

Rancho Cordova – Q1 2023 Summary

The Rancho Cordova multifamily conversion project remains in the construction phase of the business plan. We concluded hotel operations under the Double Tree Hotel flag on February 1, 2023.  

We continue to work with the City of Rancho Cordova to finalize the building plans. Although the plans were approved by the building department, we are waiting for approval from the planning department prior to issuance. The main item we are still working through with the planning department is our request for a parking reduction. We anticipate resolving this issue by mid-Q2 2023. 

As scheduled, renovations began on the main building in February 2023. Construction on the annex building continued during the quarter and was completed shortly after the quarter end. However, leasing on the annex building has been delayed as a result of the items mentioned above.   

An additional item that deviates from our initial discussions with the city is the amount of expected impact fees. The city miscounted the number of units to calculate their initial estimates, and there is no recourse to mitigate the error. We are currently expected to pay $900k over what was underwritten. Although the city has agreed to a payment plan for the sewer fees owed, we continue to negotiate the school impact fees. In the meantime, we are proposing to the city to allow us to pay the applicable fees based on the addresses of the two different buildings. Typically, these fees are required to be paid before the issuance of the Certificate of Occupancy (“CofO”). This will allow us to pay a portion of the fees owed and begin leasing the annex building.  

We continue to see higher interest expenses due to the variable nature of the loan. The current interest rate is nearly 11.4%, nearly 2.0% over our underwritten expectation. As disclosed in the prior quarter, we completed a cash management analysis for 2023 and were waiting on the outcome of the final impact fees. Although the final amount is still to be determined, we anticipate the property may need a capital infusion to cover both impact fee shortfalls and a replenishment of the interest reserves. The General Partner provided a small loan to cover a property tax payment in April 2023.  

Once we have the final costs and complete the updated cash management analysis, we plan to explore several options to fund potential shortfalls, including a refinance of the current debt, a line of credit from the General Partner, bringing in new investors, or a capital call to existing investors. We anticipate determining the outcome of the cash management analysis and the potential funding sources by the end of Q2, and will notify investors once complete.   

Per the original business plan, this investment is not anticipated to make any distributions until the disposition of the property.   

Business Strategy

• Finalize the permits with the planning department of the City of Rancho Cordova 
• Begin month-to-month leasing of the annex building. 
• Complete the renovation of the interior common areas and the 126 units in the main building. 
• Obtain the multifamily CofOs for both buildings and convert to long term leasing. 
• Lease-up the Property to a stabilized 95%+ occupancy and a net operating income that allows for either agency debt refinancing or a disposition that we believe is most likely to maximize returns to investors.   

Rancho Cordova – Q4 2022 Summary

Construction is in full swing at the Rancho Cordova multifamily investment. As previously reported, we completed a management contract with the prior hotel manager to continue operations of the main building under the Double Tree hotel flag until February 1, 2023. Hotel revenue for the quarter was slightly under $1.1M, beating our original assumptions by $655k or 148%.  

We expect to receive the building permit in Q2 2023. Two months behind the original projections. We do not see the delay as substantial or materially impacting the execution of the business plan. Construction on the Annex Building began as scheduled in December of 2022. Leasing is expected to begin on the Annex building in April 2023 on a month-to-month basis. In February 2023, we shut down the remainder of the Property and began renovating the main building.  We anticipate construction completion to be on schedule with our proforma projections.  

The interest rate on the loan is a variable interest rate. The highest interest rate in the profroma was 9.42%. The current interest rate is 10.6%. We completed a conservative cash management analysis for 2023 and depending on the outcome of the final impact fees, the Property may need a cash influx to cover operating shortfalls beginning in Q2 2023, primarily due to the increase in interest rates. Our goal is to execute a leasing strategy that accelerates revenue generation compared to the cash flow projections that does not require the additional funding; however, we also want to remain conservative in our projections to ensure we are mitigating downside risk where possible. 

We are exploring several options to fund the potential shortfalls, including a refinance of the current debt, a line of credit from the General Partner, bringing in new investors, or a capital call to existing investors. We anticipate a loan from the General Partner will be required until we can refinance the Property as the most likely and least disruptive outcome. 

Per the original business plan, this investment is not anticipated to make any distributions until the disposition of the Property.  

Business Strategy

• Finalize the permits with the City of Rancho Cordova.
• Complete the renovation of 32 units in the Annex building.  
• Begin month-to-month leasing of the Annex building. 
• Complete the renovation of the interior common areas and the 126 units in the Main building. 
• Obtain the multifamily CofO and convert to long term leasing. 
• Lease-up the Property to a stabilized, 95%+ occupancy and a Net Operating Income that allows for either agency debt refinancing or a disposition that we believe is most likely to maximize returns to investors.  

Rancho Cordova – Q3 2022 Update

We acquired the Rancho Cordova hotel to multifamily conversation Property in August of 2022. We have not yet owned the asset for a full quarter; however, there was substantial progress made during the third quarter, so we are reporting on the progress, but not including financial data. We anticipate beginning to report the financial performance of the investment with the Q4 2022 report.  

After acquiring the Property, we completed a management contract with the prior hotel manager to continue operations under the Double Tree hotel flag for five months, or until December 2022. The hotel operations have borne fruit as Net Operating Income beat our original assumptions by $63K in September.  

We have signed the construction contract with a local contractor that has ties and knowledge of the local jurisdiction. The contractor completed the prior renovation of the Property, which we anticipate will translate to time savings from a ramp up and permitting process perspective. This projection is evidenced by the fact that we have completed three model units ahead of schedule.  

We have submitted the plans, specifications, and the change of use application to the City of Rancho Cordova. Early indications from the city are positive. The Property benefits from being in the City of Rancho Cordova, as that is a smaller jurisdiction than Sacramento, and typically moves quicker and is easier to work through the process. We have seen that bear out in our early interactions to date. We received the demo permit and anticipate receiving the full building permit by the end of January 2023. That would be one month behind the original projections. We do not see the delay as substantial or materially impacting the execution of the business plan. 

We are planning to start construction on the Annex Building in December of 2022 with an anticipated completion date of February 2023. The plan is to then begin leasing the Annex building units on a month-to-month basis. At that time, we will shut down the remainder of the Property and begin renovating the main building.  We anticipate completion to be on schedule with our original projections.  

The market continues to perform from an expected rental rate perspective. Rents are up 4% across the competitive set in the last two months, and our target rents are now 17% lower than the competition.¹  

As a reminder, the value-add strategy of this asset does not contemplate cash distributions prior to a disposition of the Property.  

¹ Costar Analytics, Sacramento multifamily market, October 2022   

Business Strategy

• Capitalize on additional income opportunities prior to the construction process. 
• Complete the interior unit and common area renovations once the necessary jurisdictional approvals are obtained. 
• Complete the necessary requirements to obtain the multifamily change of use.
• Lease-up the Property to stabilized, 90%+ occupancy. Post-stabilization, focus on implementing effective management to maximize occupancy, rents, and expense control measures. 
• Target a disposition of the Property when we believe market conditions, including the Property’s operating performance, would maximize returns to investors. 

Rancho Cordova – Update

The Rancho Cordova Hotel to Multifamily conversion investment was acquired on August 2, 2022. We have taken over operations and begun the design and pre-construction phase of the business plan. We expect to have a more robust report for Q4 2022, after the first full quarter of operations.

Business Strategy

• Begin interior unit and common area renovations once the neccessary jursidictional approvals are obtained.
• Capitalize on additional income opportunities during the construction process.
• Lease-up the Property to stabilized, 90%+ occupancy. Post-stabilization, focus on implementing effective management to maximize occupancy, rents, and expense control measures.
• Target a disposition of the Property when we believe market conditions, including the Property’s operating performance, would maximize returns to investors.

Rancho Cordova – Vivo – Q2 2024 Balance Sheet

Rancho Cordova – Vivo – Q2 2024 Income Statement

Rancho Cordova – Vivo – Q1 2024 Income Statement

Rancho Cordova – Vivo – Q1 2024 Balance Sheet

Rancho Cordova – Vivo – Q4 2023 Balance Sheet

Rancho Cordova – Vivo – Q4 2023 Income Statement

Rancho Cordova – Vivo – Q3 2023 Balance Sheet

Rancho Cordova – Vivo – Q3 2023 Income Statement

Rancho Cordova – Vivo – Q2 2023 Balance Sheet

Rancho Cordova – Vivo – Q2 2023 Income Statement

Rancho Cordova – Vivo – Q1 2023 Balance Sheet

Rancho Cordova – Vivo – Q1 2023 Income Statement

Rancho Cordova – Vivo – Q4 2022 Balance Sheet

Rancho Cordova – Vivo – Q4 2022 Income Statement