Business Model

Taurean Global Properties follows a three-phase model for creating value in the multi-family asset class: Acquisition, improvement, and harvest.

This is a fairly short and simple explanation of how we do what we do. A more detailed explanation of how we conduct our business can be found under the Strategies tab above.

Acquisition

We first seek out cities that aren't so much up-and-coming as about to be up-and-coming, areas where buildings are cheap and no one is buying...yet. We familiarize ourselves with the city. We educate ourselves on the main industries, population migration, job creation, future economic indicators, etc. We then focus on the average rent levels and vacancy rates throughout the city and then do a broad sweep to look for buildings that fall outside of these parameters, and gather initial numbers on those properties.

From these figures, we perform a basic level of analysis to determine if a building warrants a further look, asking ourselves this the entire way: Can we get strong positive cash flow on this building right away?

With a careful eye, the question is often yes. Mortgage payments are the biggest expense a building owner has, and mortgages are obviously very, very cheap right now. So if we can lock our payment in for ten years, rents will rise through inflation, and by year five we are looking at fairly serious returns. More on that later.

The buildings we seek out often show a high degree of owner neglect, often requiring major repairs and upgrades. These buildings often have a high vacancy rate and/or rents that are well under the prevailing market level. Our focus rests on properties with 15 to 100 units, depending on the market. They must be large enough to get adequate economies of scale (purchasing, repair, and management) and not so large that they are in the sights of the institutional investors.

In other words, we look for properties in an area that can support a higher quality of building than the one we purchase, with the intent of upgrading the property to match the area - a Class C building in a Class B area, or a Class B building in a Class A area.

Now, it is generally accepted that approximately 80% of the value is created during this acquisition process. What makes this is even more critical is the fact that the one thing that you can't change about a property is the amount of money you spend to buy it.

So we invest a great deal of time ensuring that we negotiate the best purchase price on our properties as possible. We have very experienced and talented negotiators that work together with our real estate agents and the owners to get the property for undervalue where possible, but always at the best possible price. We are picky. Even if a great building comes along that has a lot of potential, we'll pass if we don't get a price that's going to work. The Palms, a building that we had under contact last fall, is a good example of this.

Improvement

Our ability to increase the value in a property often comes from poor property management of the previous owner. During our walk-through we get to see the areas where we can affect change that will ultimately affect the value. This is where we get our hands dirty, and where we nurture the asset. We do this in two phases.

Phase 1 is putting in the necessary money and the proper management into the property so that tenants are willing to pay more to rent the unit, and more people are interested in renting the unit, thereby increasing occupancy and building value.

This would include taking action like cleaning up graffiti, installing a new boiler, renovating plumbing, and is sometimes as simple as patching leaks and hiring an on-site manager who is able to show up sober and pick up the phone when a tenant calls. By the same coin, this also includes cracking down on bad tenants so good tenants are not scared off (Drug dealers may pay their rent on time, but nobody rents in the buildings they live in).

Tenant issues are extremely important to us, they are valued as customers just as you are valued as investors. Simply put, there is no better way to stabilize a property, reduce vacancies, and increase value then by making tenants happy. By focusing on tenant issues and addressing concerns in a timely and professional manner, we create loyal tenants that will pay more for a better building, and will cut down on advertising costs simply through word of mouth (see below).

When it comes down to it, it's not too difficult to increase an apartment building's value: Just make it a place people want to live in!

Phase 2 consists of streamlining the expenses and focusing on cost effective solutions that improve the property's bottom line. Some examples:

Taxes - Few people take the time to appeal them, and often when we have appealed taxes we have reduced them by as much as 10%. In Ontario especially that is huge, as their property taxes are about 300% higher than Alberta.

Utilities - Many owners don't monitor their heat levels, which are often way too high, at which point tenants just open up their windows at 30 below to compensate. Everybody loses. Simple monitoring of boiler output levels can drastically reduce these costs (as well as repairs, as the boiler is not being strained).

Repairs and Maintenance - This has a lot of cross-over with the "Good tenants" part of Phase I. Many property owners are crippled with repairs and maintenance cleaning up after rowdy or violent tenants. By insuring a good interdependence with our tenants, we can reduce these costs.

Advertising - Again from Phase I, this can go down to zero through tenant word of mouth. Thanks to the Internet, more and more renters are making living decisions by checking out property managers' credentials through current and past tenants and holding landlords' feet to the fire. Tenants will have good things to say about our buildings, and people will come to rent from us.

Harvest

We look to sell our buildings a few years after acquisition, depending on the market. The combination of our improvements to the building as well as the uptick in the market area results in extremely attractive returns. Check out our track record for past successes we've had.

To provide a grounding of all the information above, here's an example of how we might deal with a building. Let's say we are looking at buying a building for $1M. Most buildings with neglect will operate around $70k net (that's after expenses, but before mortgage debt). Now, we can get mortgages for about $800k at 4%. That means our debt expense is around $32k/year. That leaves us with $38k/year income after debt.

Since we have an $800k mortgage, we will have to invest $200k of investor equity to cover the $1M purchase price. With $38k income, we are getting a 16% return right off the bat!

However, let's keep in mind that these properties are distressed, and we're looking to change that. So instead of paying that cash out, we will re-invest it back into the property in the first couple years. A qualified property would allow us to get that net income from $70k to $100k in a couple years through the improvements talked about above. That gives us $68k income, or a 34% return on the $200k invested!

The best part about this model is that after about three or four years, we can go to the bank, show the increased cash flow, and up our mortgage from $800k to the full 1M, allowing us to give our investors their money back. From here on out, we are paying investors cash flow with no money in the deal.

This is why we dont care too much about upside, and why our investment is so low-risk. If upside is there and we want to sell, we can. If it isn't, who cares. We are paid handsomely to wait.

Why We Love Apartments

Inflation Protection

In a recessionary environment, apartment buildings are one of, if not the most, attractive asset classes to own, as they offer a hedge against anticipated and unanticipated inflation. Asset value is based on the Net Operating Income (NOI) generated by the property, primarily from rents, which keep track with inflation. In fact, apartment investors usually benefit from inflation, as rents increase along with rising prices and wages.

Economies Of Scale

It takes about the same amount of effort to close a purchase on one condo as it does on an entire apartment building. In many cases, it is also easier to get an accurate picture of an apartment building's quality as the owners typically manage these assets like a business and maintain a comprehensive set of records.

Purchasing

The purchase and management of apartment buildings has many benefits over smaller properties. Banks consider them to be among the lowest risk asset class (depending on asset quality) and therefore financing and the use of leverage is possible even in a tight debt market. When shopping for large apartment buildings as opposed to individual units, the closing costs are also much smaller per unit as is the energy required to find your targeted number of rental units.

Value Creation

Once the buildings have been secured, there are also economies of scale in renovation and improvement, as the Trades are asked to bid on many units. By focusing on larger buildings with more units in one location, it is easier to attract and justify the engagement of professional property management. These two activities, renovations and management, will be responsible for much of the post-purchase value creation in a project and will allow the buyer to focus on further acquisitions and development opportunities.

Market Volatility Protection

If we consider a multifamily building of 100 units, a single vacant unit translates into 1% of rental cash flow lost. Vacancies are easier to fill if the asset is professionally run and attractively maintained. Larger properties typically offer more amenities than a single family dwelling, including pools, guest suites, laundry, internet, and more, making the vacant units marketable and desirable. Now consider a small four unit building with a single vacancy which may be difficult to fill. This scenario results in a 25% reduction of cash flow with considerably more uncertainty. These examples indicate why we prefer the return profiles and stability associated with larger properties.

Stable, Predictable Customer Pool

The factors determining the demand for apartments are based on demographic and market data. It can be used to predict occupancy rates, rents, and to a large extent, asset values. On the buyer side, the markets in which we invest have a large number of people looking to own income properties, which translates into a liquid market for actively managed assets that generate consistent cash flow. Apartment buildings are popular as an asset class, so they maintain a relatively high degree of liquidity. On the rental side, the wave of Echo Boomers entering the rental market will also drive up demand for rental accommodations in the medium term. In the U.S., it is estimated that roughly 70 million Echo Boomers will make their way through college over the next decade. This group will dramatically increase the demand for rental accommodation as the tight debt environment puts home ownership out of reach for many.

Ease Of Asset Evaluation

Unlike stocks and bonds, multifamily assets are valued on the size and quality of their cash flows or NOI. Credit is available freely on the strength of the asset itself and its cash flow. By employing a professional property management team that is familiar with local markets, we are able to increase the NOI according to our conservative operating plan. Predictable asset valuation and a consistent investor ROI (Return On Investment) can be achieved by focusing on flawless execution according to our proven model.

Frequently Asked Questions

What is the extent of Limited Partnership liability?

A Limited Partner's liability is restricted to the amount of money they have invested. Personal guarantees, bank guarantees, public liability risk and all other liabilities are shouldered by the General Partner.

What if something should happen to the General Partner?

The Limited Partners can, in limited circumstances such as fraud, gross negligence, criminal activity or death of the owners of the General Partner, vote to change the General Partner.

How often are distributions made to the Limited Partners?

Quarterly

What is a Limited Partnership?

A Limited Partnership (LP) is a legal means for like-minded investors to pool their resources for a defined business venture. A General Partner (GP) is given the authority to manage the defined business investment in the name of the Limited Partners (LPs) and has responsibility for the success of the business. The nature of the business, the roles and responsibilities of the GP, the profit sharing and all other aspects of the business are outlined specifically in the LP agreement. An LP is a provincially regulated legal vehicle to raise capital for a venture without the expensive overhead of a public company. In essence, the GP/LP relationship is similar to a trust, where an appointed trustee (the GP) manages the assets held by the trust (LP). Taurean Global Properties will act as the GP in the Taurean Latitude 1 Multifamily LP. Limited Partners within an LP are afforded several benefits through this investment structure, including the following:

1. Limited Risk – exposure is limited only to the amount invested, even in the case of a disaster or major lawsuit

2. Clearly Delineated Responsibility – all aspects of the business are outlined in the Offering Memorandum (OM), including GP compensation, limitations, etc.

3. Loss Allocation – allocation of 100% of losses for potential tax savings (not uncommon in first 1-2 years of asset ownership due to start up costs, depreciation and Capital Investments in the assets)

4. Predictable Investment Timeline - value creation cycle takes approximately 5 years to yield maximum payoff

5. Resale Potential for Units - Possibility to re-sell units to future partners within the limitations of the OM as a yearly defined price (increased yearly to reflect the value realized for current investors throughout the value creation cycle)

6. Proven Legal Framework – LP structure is a well used provincial structure with oversight by financial regulators

7. Regular Distributions – Quarterly cash flow from rental portfolio

8. RRSP Eligibility – Security of investment reflected by the RRSP status granted to all Taurean LP investments

What is an Offering Memorandum?

An Offering Memorandum is the disclosure document that Taurean Global Properties must file with the various provincial security commissions. It allows both accredited (high net worth individuals or entities) and non-accredited investors to subscribe to an investment offering by a private issuer, regardless of the amount of securities purchased. The purpose of the Offering Memorandum is to provide full disclosure and detailed description of all aspects of the proposed investment. Non-accredited investors are also required to sign the Risk Acknowledgement Form in all provinces to indicate they have read and considered the contents thoroughly.

How do I invest with Taurean?

Once you have assessed your personal financial objectives with a professional financial planner and decided to become a Limited Partner, simply fill out the following forms and return them to the General Partner: 1. Offering Memorandum (White) 2. Subscription Form (Green) 3. Risk Acknowledgment Form (Blue) A check for your desired number of units must then be sent to the General Partner. We encourage you to contact us to discuss payment details. Upon receipt of the funds, you will be registered in the partnership and you will receive the necessary legal documents by mail within 10 business days.

How is the General Partner compensated for managing the fund?

The General Partner will be paid a yearly 1% Asset Management fee on leveraged assets, paid out quarterly, and will also be compensated with 20% of all distributions. After investors have been paid back their investment in full, the General Partner will receive 20% of all capital gains made from refinancing or asset sale.

Where does my money go?

How are Taurean Latitude 1 Limited Partnership units valued?

All units are initially priced at $1000 per unit. As the asset base expands and value is created, the unit values change. The price for units following the initial year are determined by the General Partner, increasing to reflect assessed value. It is to be noted that, unlike publicly traded REITs whose shares trade independently of the actual underlying asset values, our LP units reflect directly the “bricks and mortar” investments held by the Limited Partner .

How liquid is my investment?

There is no secondary market for your LP units and there are restrictions on their sale or transfer (see OM) to prevent units from being sold outside of the partnership and to ensure the investments are fully understood.

What is the time horizon for my investment?

As the value creation process for a multifamily asset under the Taurean model takes approximately 5 years, Limited Partners in all Taurean funds commit their funds for at least 5 years. After 5 years, you may “call” your investment. If the LP has enough people wishing to call, they will assess the value of the investment, liquidate and divide the proceeds among the investors.

What if I want to get out of the Limited Partnership?

Because of the nature of the investment, we require a 5-year commitment from investors. At the end of five years, the General Partner will provide each investor with an assessment of the assets at current market prices and request that any investor wishing to liquidate their units give six months notice. Should a majority of Limited Partners wish to liquidate their holdings, the property will be sold and the money distributed according to the Limited Partnership agreement, otherwise the General Partner will accommodate those requesting to retract their units either buy refinancing property or selling enough properties to provide the necessary liquidity. Investors will be given this option once a year after the initial five year period is up.

Is my investment RRSP eligible?

Yes. Please refer to our RRSP overview document for details and instructions.

What are the risks and how are they mitigated?

We use a rigorous and comprehensive combination of complex computer modeling, expert guidance, past experience and good old fashioned physical due diligence to ensure that all possible pitfalls are uncovered and factored into our operational development plan for any asset we purchase. That said however, real estate investment is a speculative venture and is risky in nature. For our Limited Partners, however, exposure to these risks is limited to the amount of capital invested. The General Partner takes on all other risks through the management of the fund/partnership.

EXECUTION RISK

Risk of achieving our desired rate of investment returns, discounting poor due diligence, depends heavily on the price paid for the asset. By pooling resources, the Limited Partnership will have the leverage needed to take advantage of low prices on quality assets that enter the market. Also, access to a pool of capital will enable the partnership to find deals in an ever tightening debt environment where the banks are unwilling to fund high leverage speculative investors. Multifamily assets are also viewed as the lowest risk asset class in the real estate family. With a solid pool of money at our disposal, the partnership can afford to step in quickly and invest where others could not fund the deal.

RECESSION RISK

If the U.S. economy slides into a recessionary environment, which is already beginning in several markets, investors shift their focus away from stocks and bonds and into real estate. Inflation diminishes the attractiveness of certain financial instruments that are not adjusted for inflation. Hard assets like multifamily real estate however, benefit from volatile environments as investors flock to hard assets to secure their money.

OPERATIONAL RISK

There are operational risks associated with this business which can be mitigated through professional management, thorough due diligence, and experience. On the whole, the multifamily asset class is viewed as the least risky of the real estate asset classes. The typical short lease terms in multifamily rentals allow for automatic inflation adjustments to the partnerships income as rents are increased in step with inflation. There is also a very large and predictable tenant pool in most large markets and ample investment liquidity given the large number of buyers searching for high value rental properties. Other commercial real estate becomes less attractive in a slowdown due to longer lease terms which do not easily adjust for inflation as well as much more limited tenant and buyer pools which correspond to increased risk.