In this episode, we're joined by CEO Mark Hamilton and CFO Ashlee Cabeal of Hamilton Zanze, a company that specializes in the pursuit, acquisition, and hands-on operation of apartment communities in select target markets in the United States.
Today we discuss the Hamilton Zanze approach to multifamily value-add investing, integrating property management, reducing expenses through green initiatives, performing 1031 exchanges as a syndication group, KPIs, and much more.
Hamilton Zanze History - Size and Markets
Mark began investing in value-add properties in the 80's in San Francisco. He stayed in San Francisco for almost 15 years, it became harder and harder over time to find great deals in San Fran. Along the way, Mark began working more in Oakland and in one other market along the East Bay. He had been in those markets for 2 or 3 years by 2000.
Tony Zanze was running a similar operation in the same area with a small team. As Mark was digging around for opportunities, Tony was working in lending, equity, and finance. Mark was a hands-on operator and very gritty, Tony was more advanced in the technical areas of real estate with an MBA and Master's degree. Tony proposed a partnership, and Mark felt they were a good fit.
Mark and Tony began to run out of deals in their specific markets. They decided to do this by working markets hard, focusing on markets one by one, until the deals dried up. Then they would move markets. One market at a time, HZ has slowly moved east. Now, HZ has properties in all regions and time zones in the United States.
Change in Investing Approach
Historically, the company focused on value-add suburban properties. HZ has since grown quite a bit, but they still focus on value-add as a core concept. Since 2008/2009, HZ took the time to totally reposition their portfolio. They felt very well prepared for the Coronavirus crisis after spending so much time on stability and newer assets with legitimate business plans per property.
In 2001, Mark and Tony made their first deal of 16 units in Oakland for $1,150,000. Between 2001 and 2006, the acquisition flow had increased to $350MM annually. This proved out the idea to Mark and Tony that their partnership had something special, that they both brought different skills to the table.
By the end of 2007, the debt markets started to get weird. Mark and Tony knew they were going to have to hunker down for 2008. In this year, they did less than half of the deal flow that had done the year earlier. In 2008, they made the same number of acquisitions at less than half of the total dollar value of the year before. In 2009 they did four transactions. In contracting, they also downsized, going from 26 people down to 17.
Coming out of 2009, HZ doubled down on being very intentional. They focused on buying larger and newer assets. HZ defines "newer" as 30 years or younger. From an efficiency standpoint, expense ratios are lower and the buildings are more efficient. In 2010 and 2011 they shifted hard to more of a scheduled income model. Since then, HZ has added a third partner and engaged in other partnerships, bringing the firm to 50 people now in 2020.
Unit upgrades are number one, areas such as counter tops and flooring. Amenities are a close second, amenities need to be top-notch for the market.
HZ likes to invest in green value-add initiates as well. This doesn't often raise rents, but it does save money on expenses - especially for the tenants. LED lights have an immediate impact to the bottom line. Windows and insulation are also very important. HZ also monitors water usage, the landscaping situation is very relevant here. HZ also looks at A/C units to make sure they aren't constantly strained.
HZ usually doesn't incorporate this into underwriting. It's not an assumption that they're willing to bake into the deal, it's more of a "hidden upside". They prefer to implement these green initiatives on a case-by-case basis and monitor the performance internally. Ultimately, they're looking to reduce tenant turnover. They want tenants to have consistent and low utility bills.
Prior to 2011, HZ was using multiple management companies depending on geographic location. HZ has since helped start a partner property management company called Mission Rock Residential, a PM company based in Colorado. They now manage all of the properties and HZ and Mission Rock work closely together. After acquisition, HZ asset managers work directly with regional Mission Rock managers almost daily. Both companies are working towards the same goal - Mission Rock helps with the business plan, CapEx budget, and value-add. This is a very honest and open relationship and Mission Rock is involved with all areas of the company. HZ is very grateful for this, it helps evolve best practices, stay consistent, and maintain full seamless financials. There's no more revolving door on property management.
Real estate is a local business. Relationships need to be built with people in the area. Mission Rock works to build the teams of individuals with the skills necessary to maintain the property in all ways. They recruit from local markets. To HZ, reliable tradespeople is everything.
1031 Exchanges: HZ is always looking to 1031 exchanges, both in supplying replacement property and selling from HZ's own portfolio. They're always upfront with investors about this, informing them about the 1031 plans and the illiquid status of their investment. If an investor wants to cash out, HZ will either buy their shares or sell the shares to another group.
Cost Segregation: HZ does cost segregation studies on acquisition and elects to take bonus depreciation.
Cash-out Refinance: HZ usually looks at long-term debt, 7-10 years. They always evaluate refinance options. After value-add, HZ looks to refinance to replace the debt, cash out equity, and receive larger long-term debt. Their average hold period is about 5 years.
If it's over 200 units and 30 years or newer, they look at Effective Gross Income (EGI), IRR, and the performance compared to the original business plan. EGI is all of the income collected from the property.
HZ looks for lenders who will work as partners. They need to fully understand the business. HZ is now a preferred borrower with Fannie Mae and Freddie Mac. For investors, no investors sign on any of the debt. If they're an exchange investor, they're responsible for their own declarations.
Learn more about Mark, Ashlee, and their work: https://hamiltonzanze.com/