Behind the Screen:

An Overview of Investment Selection & Underwriting at EquityMultiple

Introduction

EquityMultiple provides individual investors access to high-yield, professionally managed real estate, starting with as little as $5,000. We are more than just a marketplace; we provide value to investors in the following ways:

1. Experienced execution team focused on disciplined underwriting and proactive asset management team that manages assets after they have been closed.
2. Extensive in-house experience with joint venture structuring focused on mitigating risk on behalf of our investors.
3. A robust origination network that is able to respond to market dynamics and identify unique and compelling risk adjusted opportunities across asset classes, geographies, and investment strategies.
   We have a strong track record of success.

About EquityMultiple’s Investment Process

1. Robust Originations Funnel

A deep network of sponsors and brokers provides numerous and varietal investment opportunities. Casting this wide net ensures that only the strongest investments opportunities are considered, while also providing insight into developing market trends. In the first two quarters of 2022, only 9.26% of investments of the $3.93B submitted were selected to advance to the next phase of underwriting.

2. Institutional Underwriting

Transactions selected for the next phase of underwriting are subjected to an institutional underwriting process, conducted by a highly seasoned Investments Team.

At EquityMultiple, we specialize in the middle market — defined as deals valued at $20 million to $50 million — a rare sweet spot for CRE investment, which allows us to be very opportunistic.¹ We are in a unique position to be problem solvers for our Sponsors, who often come to us when they are looking to expand beyond their existing investor network, but would be otherwise overlooked by large institutional players.

In the middle market, we see projects that deliver solid risk- adjusted returns, driven by quality sponsorship that are often overlooked as larger asset managers will pass over investments of this size for larger investment opportunities.

3. Investment Committee:

Fully underwritten opportunities are presented to EquityMultiple’s Investment Committee for final decision.

Note: the Investment Committee consists of the entire Investments Team, as well as Investor Relations, Asset Management, and EquityMultiple’s co-founders. The committee meets twice per week to discuss upcoming investment opportunities, with a particular focus on responding to what we are seeing in the markets today.

4. Approval and Funding:

After thorough review, EquityMultiple approves the transaction. In the prior two quarters, only 2% of submitted transactions received approval and were posted on the EquityMultiple platform for investors like you. This selectivity has yielded an average net IRR of 15.2% as of 12/31/22, inclusive of JV equity, preferred equity, and debt investments.

5. In-House Asset Management:

Dedicated Asset Management team with significant experience across different asset classes, providing on-going oversight through investment exit. The Asset Management Team stays in close contact with the sponsor of each investment, ensures timely asset reporting, and works to secure the best possible outcome for our investors’ capital.

Flexible Investment Strategies

At EquityMultiple, we understand that investors’ portfolios are likely to change over time, along with their goals and personal risk tolerance. For instance, in times of economic volatility, some investors seek opportunities to capture attractive yields, while others prefer the relative safety of debt investments or short-term notes.

We believe diversification is the key to long-term success, and always aim to align our offerings with investors’ current needs. More on our approach below:

Seasoned Platform with Agility & Expertise

We’ve said it before and we’ll say it again: people always need a place to live. The essential nature of multifamily makes it a potentially stable asset class through all phases of the market cycle. A potential hiring slowdown in 2023 is bad news for multifamily. However, a few general trends should continue to buoy multifamily in the near future:

• Agility to shift to most attractive asset class, geography, or investment strategy.
• Open to accommodate Sponsors’ preferred investment structure — direct (individual) investment, separately managed account, (programmatic) joint venture, fund, and GP co-investments.

Whereas larger-scale investment and fund managers deploy capital en masse within (pre)- defined strategic or tactical asset allocations, EquityMultiple opportunistically offers accredited investors a path to accessible direct real estate investments or exclusive private fund structures, geared towards unlocking the highest alpha, both through investment/strategy and sponsor/manager selection. A disciplined, well-diversified approach across high-alpha opportunities has the potential to outperform broader market or beta investments.

Transaction Experience

EquityMultiple offers proven investment capabilities and strong diversification across a full spectrum of asset classes, geographies and strategies.

An Update on Transactions for 2023

We have historically had a large focus on multifamily and niche asset classes. To date, many of our individual investments have also been in the SMILE region (stretching along both coasts and through the Sunbelt).

We also are currently looking out for more debt opportunities, which can be a compelling option for risk-averse investors who prefer the security of fixed rates over a relatively short timeline. Even when evaluating potential equity offerings, we pay close attention to the Sponsor’s use of debt within the capital stack, as the debt to equity ratio can have a significant impact on the property’s risk profile.

Sample EquityMultiple Investment

Now that we’ve reviewed our high-level approach to investment sourcing, as well as our track record, we’d like to run through a hypothetical investment from a potential sponsor.

To start, we’ll highlight key information we would receive from Sponsors looking for additional capital. In this case, let’s say the Sponsor plans to acquire a value-add multifamily property in Houston with 100 units:

• The property was built in 2005, and rents are currently $800/unit.
• The business plan calls for closing costs of $500k and $2.5M in renovations, in addition to the $7M purchase price.
• Sponsor believes they can achieve a 25% increase in rents upon execution of the business plan.

We tend to start with the sponsor-provided model/financials and take that as a first sign (as we vet those assumptions) of the sponsor’s local market expertise and capabilities. Modeling errors, and inaccurate or aggressive assumptions are all red flags taken into consideration.

The team then vets the underwriting in preparation for the IC discussion through a combination of vast functional expertise on the team, various databases that we have access to, our proprietary network/materials on precedent investments.

We supplement this analysis with third-party materials, calls, and research as needed to get the required detail for our IC discussion.

Part of the early vetting process spans overlaying the sponsor fees and benchmarking those against similar/prior investments to ensure they are fair and ultimately yield sensible (full net) returns to the EquityMultiple investors on a risk-adjusted basis for each specific investment.

Based on that review and the anticipated full net return to investors, the team will seek to negotiate toward sponsor fee levels commensurate with other sponsors with investments bearing a similar risk profile and capital intensiveness. Our ultimate objective is maximizing your returns as an EquityMultiple investor, while maintaining a fair balance to incentivize the Sponsor to pursue outperformance (with the appropriate governance and oversight documented through our legal processes).

EquityMultiple has a vested interest in pairing the right Sponsors to investors, with the objective of delivering compelling returns to our base of accredited direct real estate investors, while seeking to help our approved sponsors successfully raise capital, perform on their investments, and return to EquityMultiple to offer new opportunities as they expand their business. Historic returns are no measure for future success, but a large part of manager selection rests on the acumen of the sponsor team, which is taken into consideration in EquityMultiple’s process.

Due Diligence

Upon receiving a Sponsor’s request to raise capital, the experts at EquityMultiple will review the provided information, and perform additional analysis to confirm whether a particular investment is a good fit for the platform. All of these insights are then compiled into a screening report (more details on key sections below).

To summarize, when sourcing a potential opportunity, team members tend to trust that Sponsors will be honest. Due diligence is where we then trust nothing and verify everything.

Specifically, the designated offering lead, offering associate, and offering analyst will dig into the Sponsor’s track record. The team will research completed investments, interview prior debt and equity partners, and ask Sponsors for sample reporting they’ve done for previous investment opportunities.

Investment Highlights

Note: if you are already familiar with EquityMultiple’s offerings, you may recall seeing some of these bullet points, which typically end up featured near the top of the offering page, and in our offering announcement emails.

The goal of this section is to call out any specifics of the business plan that make it a particularly compelling opportunity.

Business Strategy

What does the Sponsor plan to do to improve the property upon acquisition? In a multifamily value-add property, for instance, the Sponsor would likely have plans to renovate the common areas, and add meaningful amenities, such as a clubhouse, fitness center, dog park, and BBQ grills. Upon completion of these upgrades, the Sponsor might believe they can raise rent by $200/unit.

Another way they might aim to add value is by hiring a new property management company to increase operational efficiency.

Sponsor Overview

At EquityMultiple, we primarily look for Sponsors with strong track records of success. According to Marious, “the most important part of originations is ensuring that we have Sponsors we can trust;

Sponsors who have experience in the market, as well as in the asset class, and with the particulars of the business plan.”

This is another area of focus for the team at this stage of the process. Although we’ve worked with Sponsors of all sizes, we would likely rule out a small family office, for instance, if we got the impression that they could not provide timely and accurate reporting.

Property Overview

The details of this section will vary depending on the type of investment. Using the above hypothetical multifamily offering as an example, we would likely dig into the historical and projected revenue to see if it seems realistic. A few questions we consider at this point include:

• How old is the property?
• When was it last renovated?
• How many square feet is it?
• What is the current occupancy rate?

Worth noting: there is no hard and fast rule about which types of properties we would consider a good fit for the platform. Our team takes an opportunistic view to any and all investments, provided they make sense from a business perspective. Older Class B or C properties, for example, may be potentially interesting if we believe the Sponsor can successfully reposition the property.

Quality of the asset is important, but weighed against the business plan/underwritten projected returns (which need to be supported by market data/stressed in downside case, and still yield appropriate risk-adjusted returns).

Market Overview

At EquityMultiple our Real Estate Team puts together a Comparative Market Analysis for every property listed on the platform. The report is included as “Comparable Sales” in offering memorandums for investors to review when considering their investment. Additionally, we seek to have calls with local market experts to supplement our own findings/internal databases, as well as stay connected to the latest market updates/movements as they relate to our potential investment.

Returning to our example of a multifamily property in Houston, this snapshot might include the average rental rate, vacancy rate, capitalization rate, number of units, zoning regulations, and supply and demand in the market area. On that note, a few questions we explore at this stage include:

• What are the demographics of this particular MSA?
• How are the employment numbers?
• What do current and forecasted rents look like?

While there is no firm criteria, our factors when we look at markets generally center around the ability to grow top-line revenue weighed against supply/demand for the sector in that specific market, a series of qualitative and quantitative metrics for any market/region, (outlook on) asset valuations and returns, as well as key demographic/employment or asset class-specific drivers, that we seek to incorporate into our broader IC discussion.

Key Assumptions

In this section, our goal is to synthesize all the information we have processed up until this point to model in/stress-test for a downside scenario. The thorough scenarios we run are a key decision point, with many investments not making it to the platform (or sometimes even the IC meeting itself) if we feel a realistic downside scenario would yield too large of a loss.

Without giving away too much of our secret sauce, this section is where our Real Estate Team can truly shine. We essentially poke holes in the information our Sponsors provide us, plugging the numbers into our own proprietary data models.

Assuming all goes according to plan, what kinds of return metrics can we expect for our investors?

Key Risks/Mitigants

The final section in our screening report, which our Real Estate Team will subsequently package up and present to the Investment Committee, is an overview of key risks and mitigants.

We evaluate the investment as a whole, and call out any potential areas where there is a risk of the business plan falling through. Note: while all investments involve risk, some are certainly riskier than others, and we always take this into account.

Many of our investors gravitate toward investments that have a high IRR (which naturally tend to fall on the higher-risk side of the spectrum). That said, we would not move forward with any opportunities that seem suspect upon analysis.

Conclusion

Our Real Estate Team is constantly on the lookout for new investment opportunities that meet the needs of our investors, and reflect current market conditions. We are proud of the level of vetting our team applies to every investment at EquityMultiple, but as always, we encourage you to do your own due diligence prior to making an investment decision.

We hope you find this whitepaper helpful as you continue your investing journey.

If there are any questions that we can answer, please do not hesitate to reach out to us at ir@equitymultiple.com or 646–844–9918.

Glossary

Note: we’ve included definitions for a few key terms you may find helpful to review when reading this whitepaper. Please refer to our full Glossary page or our Resource Center for more information.

Cap Rate: Cap rate is the rate of return for a property based on its annual income. It is calculated by dividing the net operating income of the property by the total value of the property.

Capital Stack: The capital stack refers to the legal organization of the capital invested in a project. The stack contains the most risk at the top, traveling down the stack to the position with the least risk. Higher positions in the stack expect higher returns for their capital because of the higher risk.

Co-GP: A co-GP arrangement allows the sponsor to contribute less of their own equity (“skin in the game”) than they would otherwise have to. Investors in a co-GP structure can passively participate without having to deal with the day-to-day management of the investment while potentially earning outsized return usually reserved for the GP.

Loan-to-Cost (LTC): A ratio used in commercial real estate construction to compare the amount of the loan used to finance a project with the cost to build the project. If the project costs $1 million to complete and $700,000 is borrowed, the loan-to-cost (LTC) ratio would be 70%.

Mezzanine Debt: Mezzanine debt is a hybrid lending vehicle, commonly used by real estate developers, to secure supplementary financing. Mezzanine debt gives the lender the right to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. It is generally subordinated to debt provided by senior lenders such as banks and venture capital companies.

Net Operating Income (NOI): The income stream generated by the operation of the property, independent of external factors such as financing and income taxes. A property’s yearly gross income less operating expenses.

Senior Debt: Senior debt is the first level of a corporation’s liabilities which means it is paid out first, ahead of all other creditors. Senior debt is the safest form of financing for the party providing the funds. Should a corporation go bankrupt, any remaining funds, dissolved assets or other available sources of value must first repay senior debt before other creditors are able to collect.

Sponsor: A real estate sponsor is a principal investor in a real estate offering, responsible for sourcing the investment and executing on its business plan. In many cases the sponsor has a background in asset management and construction/development, as well as real estate finance.

Underwriting: Underwriting is the process by which an underwriter performs due diligence on and otherwise scrutinizes a financing request made by a Sponsor seeking funding for a real estate project to determine how much risk to accept.

Learn more at equitymultiple.com