The Pax Properties
CAP Plus Diversified Income Fund
Designed to Deliver Significant Cash Yields & Competitive
Long-term Total Returns From Strategic Property Investments in Select Value & Growth Markets
Pax Properties is pleased to offer shares in The CAP Plus Diversified Income Fund. The fund will buy and improve income-producing real estate in value and growth markets throughout the US while taking advantage of today’s historically low interest rates. The improved operations and cash flow, combined with low-cost, long-term, fixed-rate, amortizing debt, are expected to produce significant cash yields and competitive total returns with moderate risk.
Targeted returns are 14% to 18% annually. These include expected cash yields of 5% to 7% in the first two years as the fund is acquiring assets, over 8% by year three when the portfolio should be largely stabilized, then growing by about a half percentage point a year from there.
The fund will invest primarily in apartment communities. Yet, it will also from time to time pursue other types of income-producing properties that are selling at significant discounts due to special circumstances. In all cases, the fund will target cash-flow properties selling below or close to replacement cost.
Over the last 19 years, Pax has used this strategy to purchase, renovate and operate over 1,100 units, comprising over $100 million worth of real estate. During that time, we have never failed to deliver positive returns to investors—not even during the crash of ’08-’09 or the Pandemic of 2020-21. Instead, we have been able to consistently deliver competitive and superior returns through boom and bust markets.
The Cap Strategy
Our unique track record is due mostly to a conservative investment philosophy that prevents us from chasing prices into the stratosphere or pinning our hopes on market appreciation—a factor beyond anyone’s control.
Instead, Pax has developed a system that focuses on the three key elements we can control: Cash Flow, Amortization and Positive Leverage. These are the “CAP” factors. We also aim to reduce risk by staying close to replacement cost, buying in value and growth markets, and working diligently on operations and marketing to maximize the performance of each asset. These are the “Plus” factors referred to in the fund’s name.
Following are some of the key forces supporting demand for multifamily housing in the intermediate and long term, especially for the working-class and
middle-class communities in the southern markets on which we focus.
In 2020, Pax completed extensive renovations on the
168-unit Renaissance Apartments in Tallahassee, FL, nearly quadrupling NOI and increasing equity value by
over $7 million.
Macro Trends Driving the Market Today
Using our CAP Strategy investment approach, we plan to take advantage of three historic trends now in place:
1. A decade-old undersupply of quality, affordable housing for working- and middle-class tenants—recently exacerbated by the drop-off in construction during the pandemic;
2. Historic low interest rates, which can be locked in for as long as 30 to 35 years;
3. A recent acceleration of the long-term trends of migration from crowded to less crowded, from high tax and regulation to low tax and less regulation, and from markets with relatively expensive to far more affordable costs of living.
Here’s the backdrop to the opportunity we’re finding in select multifamily property markets today:
Rental Housing Demand Remains Strong in Key Markets
Between 1980 and 2008, the US produced an average of 1.5 million housing units a year. For the following decade, that number dropped to just under 900,000—even while the formation of new households averaged over 1,000,000 a year. At the beginning of 2020, we were on track for a strong recovery year, when the pandemic nearly halted construction for six months and further delayed the move back towards equilibrium.
At the same time, migration within the US is set to reach new highs. Professionals who have discovered how effectively they can work remotely are moving from expensive coastal cities to the more affordable sunbelt in droves. Many of the businesses that employ them are starting to do the same. Income tax-free Texas and Florida are among the most popular destinations, but the trend is also benefitting southeastern states from Arkansas to Georgia and the Carolinas.
New retirees continue to follow this path as well, with 10,000 baby boomers a day entering the ranks of “seniors” and many of them moving to warmer climates. New immigration policies, meanwhile are likely to result in the largest influx of immigrants into the country in years. Finally, America’s 73 million millennials still opt for renting in greater numbers than previous generations, as they struggle to recover from two major economic shocks in their young lifetimes.
Combined, these trends support demand for rental housing. They are already heating up the multifamily market. However, there are still select markets where working- and middle-class properties sell for below or close to replacement value, offering significant cash yields and the potential for strong long-term total returns. This is where we intend to make most of the fund’s investments.
Examples of Value Opportunities We’re Buying
And Future Opportunities We’re Targeting
At Pax, we have invested extensively in search engines and lead generation. We have also developed a “birddog network” of fellow investors and commercial brokers who use our resources, training and criteria to winnow for deals in a half dozen states. This means we are able to review dozens of new opportunities each week and drill down on the two or three that offer the most promise. As a result, we have recently entered into contract on three cash-flow properties, scheduled to close between mid-May and late July.
These include a 91-unit apartment community in a solid, working-class area of Tulsa (a city that has grown faster than the national average for the last 10, 20 and 30 years), as well as on a 126-apartment community in Oklahoma City in an increasingly popular neighborhood close to downtown. We also just executed a Purchase and Sale Agreement on a 78,000 square-foot, shopping-center-anchored plaza on 10 acres near the intracoastal waterway on Florida’s rapidly growing space coast.
In addition to these, we have identified a number of other properties selling at reasonable prices relative to rents, and where we believe we have good prospects to grow the income after making improvements to the property and management. Conservative projections are for stabilized cash flow of 5% to 6% of the total investment. When financing 70% to 75% of these investments with fixed-rate debt in the mid-3% to 4% range, our cash yields should rise to the 7% to 10% range, with total returns in the low teens, not counting appreciation.
Here are a few of the deals we are underwriting:
170 garden-style apartment units in a B area, just off Highway 288, 40 miles south of Houston. The property is a half-century old, at 83% occupancy and ready for a new round of capital and more dedicated management to bring it back up to its best potential. We’ve conservatively budgeted $10,000 a unit for renovations, on top of an acquisition cost of $55,000 a unit.
The CAP Plus Fund’s new Tulsa Property, soon to be renovated, repositioned, and renamed, "The Apex @ Midtown", at Contract
91 units, 99,550 sq. feet, 1962 construction frame & masonry, $42/sf, post-renovations: $55/sf; approx. 55% under replacement value; C+ neighborhood, 91% occupancy; projected stabilized cash yield: 8.6%.
Pax Growth Score: 90; Pax Value Score: 93
The CAP Plus Fund’s Oklahoma City Apartments, at Contract
126 units, 90,588 sq. feet, frame, stucco & siding 1968 construction, $59/sf, post-renovation: $81/sf; approx. 35% under replacement value; 90% occupied, B- area trending to B, projected stabilized cash yield: 9.1%.
Pax Growth Score: 88; Pax Value Score: 92
The CAP Plus Fund’s Supermarket-anchored Shopping Center on the Space Coast of Florida, at Contract
78,540 sq. ft, concrete block & stucco 1986 construction, $102/sf; post renovations: $111/sf, approximately 20% under replacement value; 97% occupied, on 10.1 acres across from the intracoastal waterway, projected year-one cash yields: 8.0%.
Pax Growth Score: 91; Pax Value Score: 90
A 241-unit off-market apartment community in a growing community 80 minutes south of Atlanta. After a $2.5 million renovation budget, our all-in costs come in at just under $60 a square foot. Conservatively assuming a 3% rent boost from the improvements, results in cash yields in excess of 9%.
A 118-unit affordable housing community in a growing market on the west coast of Florida. Initial yields are in the 5% range, yet governing covenants will reduce taxes and increase some rents over the next two years. Combined with favorable financing, cash yields should average over 7% the first five years. We may be able to acquire this 12-year-old property, in good condition and in a good area, for less than $80 a square foot.
A lender-owned, 114-unit extended-stay property in a good area in a major Texas market. This property is ideal for conversion to apartments as unit sizes range from 523 to 720 square feet, about twice the size of typical hotel rooms and instead right in line with one-bedroom apartments. Also, all units also already have kitchenettes. The property is of 2006 vintage, well maintained and can be bought and renovated for a total cost about 20% less than the market value of comparable apartments in the area.
The Pax Legacy Portfolio (871 Units)
An assortment of five hotels and one 168-unit apartment complex bought between 2013 and 2018
and still owned and operated by Pax Properties today.
The Vero Beach Inn & Suites
This 114-room inn was Pax’s first 100+-room hotel. Since acquisition in 2013, investors have received distributions every quarter, with cash yields never less than 7.5% and averaging 9.5% overall. Pax has also returned 80% of original investor equity to investors through refinancing—while investors ownership stakes never decreased.
The Melbourne All Suites Inn www.melbourneallsuiteinn.com
When Pax bought this former 235-unit hotel out of bankruptcy in 2015, it was the most visited place by police in the city. Then Pax reimagined it and created 140 suites and turned a decaying IHOP into a Key West style building, winning county beautifications and may other awards, including Trip Advisors’ highest award every single year since Pax reopened it. Today, the property is so popular, it posted positive Net Operating Income and post-debt cash flow every single month of the pandemic—the worst hospitality market on record.
The Baymont Inn & Suites, Tallahassee Central www.paxhotelgroup.com
This 135-room property is Pax’s only franchise hotel, as the company prefers to put on its own stamp. Since acquisition in 2016, Pax has delivered annual cash yields of over 6.5% and has returned over half of initial equity capital through refinancing. As with Vero and all of Pax’s investments, when investors receive a return of some or all of their original investment, their ownership share never decreases.
The Seven Hills Suites www.sevenhillssuites.com
Acquired at the end of 2017, Pax gutted and repositioned the property, creating 160 suites, including 40 two-room “flex suites.” Within five months of its Grand Opening in December of 2019, the hotel (which had been the second-lowest rated in the city) rose to # 1 out of 61 hotels and won Trip Advisor’s Travelers Choice Award.
The transformation was so dramatic, other awards followed, including commendations from the Mayor
of Tallahassee. Then Covid hit and the local market dropped 60%. Pax pivoted immediately, renting our three quarters of the property to a local non-profit organization. The property went on to post positive cash flow every month throughout the pandemic and “hotel depression.” Today, the property is back to exclusively serving traditional business and leisure guests; it is still top ranked in the market and is poised to become perhaps Pax’s most profitable hotel yet.
The Equus Inn www.equusinn.com
Pax bought the 152-room Quality Inn in Ocala towards the end of 2018 and immediately dropped the “flag,” opting to go independent. Since then, the Equus has gone from # 13 to # 4 out of 39 hotels in the market even while construction is being completed just now. Investors have so far received average cash yields of 4% through renovations and a pandemic. Pax expects to deliver cash yields of nearly twice that going forward as this innovatively designed hotel is a heavy favorite to be the third Pax Property to win Trip Advisor’s top award.
The Renaissance Apartments @ Capital Circle www.tallypads.net
Pax bought this former C, - 168-unit apartment community in Tallahassee, FL in mid 2017 and proceeded to invest all its experience from dozens of smaller apartment buildings as well as what it had learned from its hotels. Today it is a best-in-class B+ property at 99% occupancy with rents up 35% and profits more than quadrupling since purchase. Bought for $8.9 million, the company invested nearly $7 million in improvements—including new plumbing, electric, HVAC, windows, roofs and all aesthetic upgrades. The renovations have made the 45-year old property essentially newer than most properties built ten years ago. The result is $1.4 million in Net Operating Income slated for the coming year and unsolicited off-market offers recently made on the property suggesting an increase in market value of $7mm to $8.5mm over Pax’s total investment in less than four years.
Conservative Underwriting and a Focus on an Alignment of Interests Has
Produced Consistently Profitable Investment Results for Pax Investors
Pax's 140-unit Melbourne All Suites Inn in Melbourne, FL has won Trip Advisor's top award four years in a row and has been cash-flow-positive throughout the pandemic.
As is typical of Pax investments, the CAP Plus Fund is lighter on fees than perhaps any other similar vehicle in the marketplace. We do this for an alignment of interests, as we prefer to make money for and with our investors; not off of them.
Also, our primary financial goal is to never lose an investor a dollar. That’s because we believe that when you focus on the downside, and are diligent operators, the upside tends to take care of itself. That has been our experience over the last 19 years.
Pax Properties began investing in small residential properties in 2002, then moved up to apartment buildings of 10 to 20 units and then to hotels and apartment communities of 100 units and more. During that time—through booms, busts and a pandemic—Pax has never failed to deliver a positive result to investors.
Following is a summary of its Pax’s entire investment history and the returns it has produced for over 150 accredited investors:
(54 apartments & SFH’s)
A collection of 31 smaller residential properties in S. Florida, Jacksonville, FL and Austin, TX bought and sold between 2003 and 2017.
Average Annual Cash Cash-on-cash Yields during Hold Period: 9.9%
Average IRR: 15.1%
Five 9- to 14-unit apartment buildings (55 apartments Total) within a block from the beach in Pompano Beach, FL bought and sold between 2009 and 2017.
Average Annual Cash-on-cash Yields during Hold Period: 10.6%
Average IRR: 15.4%
The Pax Twin Boutique Property Portfolio
(42 Units)Twin Boutique Property Portfolio
A 20-unit apartment building and a 22-unit hotel building across from each other in Lake Worth Beach, FL bought and sold between 2012 and 2020.
Average Annual Cash Cash-on-cash Yields during Hold Period: 9.7%
Average IRR: 19.1%
FUND STRUCTURE & ALIGNMENT
The Fund Is Light on Fees
The Cap Plus Diversified Income Fund charges a one-time fee on acquisitions capped at 1% of the total deal cost. From that 1%, Pax may pay local partners for help sourcing and closing the deal. For asset management, Pax charges 0.65% (sixty-five basis points) on assets under management. As for profit-share, investors receive a 7% cumulative preferred return and 65% of proceeds above that.
Comparing Pax’s fee structure to the common “2 and 20” used by many funds, Pax delivers far more of the total returns to investors. The following table shows that, when generating modest returns, the “2 and 20” model pays triple the amount to the sponsor as would be the case with the Pax model. When performing very well, the traditional “2 and 20” still pays out more to the sponsor and less to investors than would be the case with the Pax model.
The following table supposes a fund with $100 million under management, comprised of $30 million of equity capital and $70 million of debt, over a 10-year period.
The Pax Model
"2 + 20" Model
In every instance, the Pax model delivers more to investors than the “2 and 20” Model.
Aiming for High Performance and Significant Savings
Apart from asset management, Pax Properties will provide services that would otherwise be contracted out to third parties. This primarily includes construction and property management.
Pax does not charge a construction fee. In cases where its affiliate Pax Construction Services, LLC (PCS) does the work, fees charged by PCS shall be limited to cost plus 5%. For property management, Pax charges a maximum of 3.5% of revenue, with no charges for leasing. Most property management firms, when accounting for all fees, typically charge at least 5% of revenue. Pax will also use its banking and finance relationships to obtain the best bridge and long-term debt for the properties we acquire. Pax does not charge finance or refinance fees.
A Fund with a Long-term View
That Also Provides for Exit Opportunities in the Intermediate Term
We are long-term investors. Our preference is to own a good asset “forever.” That’s because our experience has shown that when we buy, renovate, manage, maintain and finance assets well, the portfolio can produce superior returns, return all invested capital, and generate passive income long after that. The fund is established with a similar long-term view: an eight-year term and two optional two-year extensions.
Yet, the fund also allows for wrapping up before the initial term if we come to believe that will produce maximum value. It also provides for the sale and purchase of shares between investors and for the fund to offer to buy back shares at fair market value, subject to liquidity events such as refi’s or individual property sales.
The fund will issue distributions quarterly, at the end of April, July, October and January, along with financial statements and a Report from the Manager covering the previous quarter’s activity and developments. Financial statements will include a consolidated P&L, balance sheet and cash flow statement. We also provide an investor portal with individual logins, where investors can check the status of their accounts, access payment histories, tax docs and previous reports and statements. The portal will also have available financial statements at the individual property level along with the general ledgers for each property.
A Limited Window of Opportunity
Widely available, ultra-cheap money—such as we have today—can quickly inflate assets and create bubbles. We saw this with the internet 20 years ago and in real estate a dozen years ago. Soon, we may see it again in the financial and property markets.
But we don’t chase prices or listen to brokers who tell us to buy now because a market is “hot.” Our investment decisions are tethered to the real world by the fundamentals of value. We will only pay prices where the properties can produce Cash Flow to comfortably pay for fixed-rate, Amortizing debt in a way that results in Positive Leverage (increasing the return on equity without dramatically increasing risk). That’s the CAP Factor approach.
Also, when our all-in renovated cost is close to or below replacement cost, we’ve added to our margin of safety. It will be difficult for new supply to come into our markets and undersell us on price. By focusing on value opportunities in growth markets, we further mitigate risk.
In the 1990s, I was the publisher of a small group of international investment newsletters. In that capacity, I had the good fortune to be the editor and publisher of Dr. Kurt Richebåcher, former head of Dresdner Bank and perhaps the pre-eminent Austrian School economist of the time. While working together, he accurately predicted the crash of the Asian Tigers and the collapse of the Internet Bubble, among other major macro calls.
His focus on the fundamentals, sound theory and original data sources had an impact on me. By the time I began investing in real estate in 2002, I saw that many of the so-called “professionals” and “experts” in the field had no objective understanding of the market or their business; they were just part of the sales machine, like the stock jockeys of the 1990s.
By 2004, I started warning of a brewing real estate bubble in Early to Rise, an E-zine with a circulation of 400,000. I repeated the warning in over a dozen articles up to the crash in 2008. I advised people not to buy real estate unless they could do it at prices that produced enough cash flow to cover fixed-rate mortgages and set aside reserves for a rainy day. I steered them away from “Bubble Markets” and to “Value Markets.” My top Value Market, Austin, never crashed.
Most importantly, I followed my own advice and when the crash came, I had a dozen properties, all of which I continued to pay for and all of which I eventually sold for good profits. When the crash deepened in ’09, I began to raise money and buy on a larger scale than I had before.
In mid-2010, I quit my lucrative publishing career to focus on real estate full time… and went on to add 1,000 units over the next ten years.
I’ve been through bubbles and busts. That includes Covid, during which we owned seven hotels. Two of them we sold for healthy profits just before the Pandemic turned into an economic shutdown. The other five have paid their debt service throughout the crisis without missing a beat.
Intelligent investing includes taking the downside into account as well as the upside. Right now, we’re facing the lowest mortgage rates in history. They could soon create distortions in the market. In the meanwhile, however, we have an opportunity to buy sound properties in growth markets at reasonable prices and lock in historically low financing rates to ratchet up long-term returns.
These rates won’t stay low forever and the affordable properties we’re targeting may not be affordable for much longer. We are acting now because we believe we have a unique opportunity to benefit from strong fundamental demand factors, inexpensive fixed-rate financing and a proven, long-term investment approach focusing on cash flow, amortization and positive leverage—while targeting assets bought below or close to replacement value in growth markets.
How to Invest
The Cap Plus Diversified Income Fund is limited to accredited investors only. The minimum investment is $100,000; the maximum is $5,000,000. Subscriptions are accepted in the order received. Since we have been fortunate to sell out our last six equity offerings fairly quickly, if you may be interested, we ask that you let us know as soon as possible so we can tentatively reserve a spot for you. Please send your email to email@example.com, indicating the amount you are considering investing.
You may also go directly to our Investor Portal where you can access the Private Placement Memorandum, Subscription Document, and Operating Agreement. To subscribe, you may do so securely online via DocuSign.
If you have any questions, please do not hesitate to send an email to firstname.lastname@example.org or call (561) 573-2295.
Thank you for the opportunity of putting this offering to your attention. We look forward to the prospect of investing successfully together.
Pax Properties, LLC
The CAP Plus Diversified Income Fund
April 16, 2021