UNDERGROUND INSIGHTS | Issue #1
Most operators lead with the deals they won. We're going to do something different. The fastest way to understand how we think is to watch us walk away from a deal that looked fine on paper.
This is a monthly note from Ed on what we're buying, what we're passing on, and how we're protecting capital. No hype. Just the calls we're actually making.
A Deal We Analyzed, and the Decision We Made
About 50 deals come across our desk every month. Each one runs through the same review before a human ever looks at it. The model builds the financial breakdown, a negotiating strategy, a recommended opening offer, and the most we'll pay. Then it drafts the letter of intent. A person steps in only after the math is done. The model's job isn't to find reasons to buy. Its job is to find every reason not to.
Here's one from this month that didn't make it.
An 18-unit brick apartment building in a solid Connecticut submarket came to market at $4,000,000. On paper it looked clean. Well maintained, individually metered, tenants pay their own heat and hot water, no central systems to fail. Fifteen of the 18 units were already at or near market rent. The listing put the cap rate at 6.5%.
We don't buy off the listing cap rate. We rebuild the operating statement line by line and see what survives. Two numbers didn't.
The first was the tax line. The offering showed a $25,000 tax bill. In Connecticut, the town reassesses the property after a sale, and at this price the real bill comes in near $60,000. That one fix wipes out more than $34,000 of income a year.
The second was property management. The statement modeled it at 6% of revenue. Nobody runs an 18-unit building in this state for 6%. The real number is closer to 10%. That's another $14,000 gone.
Fix those two lines, normalize the vacancy, and the 6.5% cap rate the listing advertised becomes 4.2%. That's the actual yield the building throws off on day one.
Now put it against our rule. On a deal like this, we fund with agency debt, which costs us about 6%, and we can usually get it on any acquisition over $1 million. We want at least a 2% spread above our cost before we buy, so the going-in cap rate has to clear roughly 8%. A real 4.2% yield against a 6% cost of capital isn't a thin spread. It's a negative one. We'd have been paying to own the building.
We only waive that 2% rule when there's a clear, fast way to lift the yield after we close. A financial problem the prior owner left on the table. Deferred maintenance to burn off. Under-market rents to bring up. This building had none of that. It was already stabilized, fifteen units at market, nothing to fix. We'd have been buying someone else's finished work at full price and hoping nothing broke.
The price where the deal actually works is about $1,900,000, roughly 52% below the ask. That's not a negotiating gap. It's a different opinion about what the building is worth. So we passed. We'll keep an eye on the listing, and if the seller resets after 60 to 90 days on the market, we'll look again.
That's the part most investors never see. We say no far more than we say yes, and most of our offers go nowhere because sellers in the Northeast are often years behind on price. We're fine with that. We'd rather miss a hundred deals than buy one that has no room to be wrong.
When you put capital with us, that no is what you're paying for as much as the yes.
Project Update: Brault Hill
Brault Hill is a 58-acre parcel we're developing in Connecticut. Like the deal above, the plan is to take risk off the table early and let each piece stand on its own.
We're finishing a flip of the existing house on the property, which we expect to wrap in the next two months. The sale of that house, once the renovation is done, is the move that matters most. It washes out the debt on the property and recovers our acquisition cost. After it closes, we own everything that's left at a basis near zero, and we build from a position of safety instead of exposure.
Once the debt is gone, there's more upside to capture. We expect to sell a portion of the land to a neighbor as a separate, later step. That sale isn't what clears the debt, the flip already did that. It's extra cash on top of a parcel we already own near zero, which de-risks the project even further before we build.
The bigger opportunity is the land itself. The parcel carves into seven to ten buildable lots. Once the survey is done, we plan the road, the stormwater management, and the utility stubs to each lot, so the lots are fully serviced and ready to build.
From there we keep our options open. Plan A is to build single-family homes and sell them. Plan B is to build duplexes on the same lots, rent them, and sell the package to a larger investor. We don't have to decide today. We get the land entitled and serviced, then let the market tell us which path pays more.
That's the same idea as the deal we passed on. Protect the downside first, keep every piece independent, and never let one project carry all the risk.
How We Protect Your Principal
Most funds tell you the target return and stop there. We'd rather show you the mechanics, because the structure is the actual product.
Our Capital Preservation Fund lends to experienced, vetted Connecticut operators through Clark St Lending. We're the lender on every one of these flip projects. The fund targets a minimum of 11% to investors, paid as monthly income, from a first-position lien. It's a target, not a guarantee. Here's how that yield gets built and protected.
We lend from the front of the line. The fund holds a first-position lien on every deal. If something goes wrong, we're first in line on the property, ahead of anyone else.
We hold six months of interest in escrow. Before a borrower draws a dollar, we set aside an interest reserve. That means the loan can keep paying you even if the borrower hits a rough patch on their project. Your income doesn't depend on the borrower having a perfect month.
We only lend to operators who've done this before. Every borrower clears a vetting process and a minimum credit bar. These aren't first-timers learning on your money. They're flippers with a real track record, and Ed has done exactly what they do dozens of times over.
We work the problem before we ever take the keys. If a project starts slipping, our first move is to get in and help the borrower fix it. We'd rather save the deal than seize it. But the protection is there if we need it. If a payment runs 30 days late, the borrower is in default on day 31 and we can step in, take over the project, and protect the capital.
We invest alongside you, on the same terms. Here's how your yield actually gets built. We're the lender, so the money comes from the interest we charge plus points. Capital goes out interest-only, for 12 months, and riskier projects or less-experienced operators pay more. The only thing taken out before you get paid is what it actually costs to run the fund. There's no promote and no extra fee skimmed off the top. We put our own money in on the exact same terms as yours, so we win and lose right next to you. Those operating costs move from month to month, and that's the honest reason we target a return instead of guaranteeing one.
The Capital Preservation Fund is open now. The minimum is $100,000, on a 12-month term. If you want to walk through exactly how the structure works on a real deal, reply to this email and we'll set up a call.
Real Estate Underground
Ed hosts the Real Estate Underground podcast, with new episodes every Tuesday at 12pm. If you want to hear how operators actually think about deals, that's where the long-form conversations live. The latest episode, number 200, is a conversation with James Lloyd on building turnkey cash flow in Detroit.
Clark St Capital offers securities under Rule 506(c) of Regulation D to accredited investors. Past performance is not indicative of future results. Target returns are targets, not guarantees.