Lucas Portfolio — Q3 2026
Dear Partners,
The third quarter was the heaviest construction period since acquisition, and the results are showing up in the rent roll. Homes renovated and leased in 2026 achieved an average increase of about $476 per month over prior rent, and at September 30 renovated homes were renting for about $486 more than the un-renovated homes beside them. About 73 of our 136 homes are renovated today, and we expect roughly 79 (58%) by year-end.
Taking homes offline to do that work held income below plan for now: net operating income for January through September was $1.00M, 7.3% under budget, and occupancy at September 30 was 85.3%, with 12 homes intentionally down for renovation. There was no distribution this quarter. The properties produced $338K of cash flow after interest-only debt service, and all three are cash-flow positive on their own. The timing item is early 2027, when the loans convert from interest-only to amortizing payments and annual debt service rises by roughly $350K.
The tabs above walk through the renovation program and the 12-home relocation program, the rent premiums we are capturing, the $1.90 million of BECU construction capital now going into the building exteriors, operating results, where this year's cash flow went, and the milestones ahead of resuming distributions.
Our base case shows the portfolio covering the new amortizing payment at about 1.42x once renovated homes are leased, and our current target is to resume distributions in mid-2027 once those milestones are met. We will confirm or revise that target in each quarterly update. Thank you for your continued partnership.
47 Homes Through the Renovation Program in 2026
Renovated homes are leasing at a consistent premium across all three communities, and the remaining construction capital is now going into the buildings themselves. Year-to-date NOI is behind budget because homes are offline for renovation; the 2027 base case covers the amortizing loan payment with room to spare once those homes are leased.
This year alone, 47 homes have moved through the program: 29 renovated homes leased or pre-leased, 12 under construction now, and 6 more queued. In August we also issued 12 targeted 90-day renovation notices on legacy homes so the work could be completed while BECU construction capital remains available; we anticipate about $84K per year of added rent from those homes. As of October 26, excluding homes down for renovation, only two homes across the portfolio were vacant and unrented.
What went right this quarter
47 homes moved through the 2026 renovation program, and three relocated households chose to stay in renovated homes. Utility cost recovery improved from about 55% in June to about 70% today. Exterior work is moving at all three communities, with four Briarwood buildings already repainted. Heritage NOI is running ahead of budget year-to-date, and a new collections partner is fully integrated with the property management system.What we are managing
Occupancy of 85.3% at September 30 with 12 homes intentionally down for renovation; interior renovation delays from material lead times; the interest-only to amortizing step-up in early 2027; moving tax and insurance reserves into a dedicated reserve account; an inherited permit issue on the Briarwood unit conversion; Williamsburg running $73K behind its NOI budget; and $27K of rent more than 60 days past due.About 79 Homes Renovated by Year-End, Up to 85 if the Queue Finishes
Roughly 73 of the portfolio's 136 homes are renovated today. With the 12 homes now under construction, we expect about 79 (58%) by year-end, assuming the revised completion dates hold, and up to 85 (63%) if the six homes queued behind them also finish before December 31. This year, 20 renovated homes leased January–August, 9 more were delivered in September and October and are leased or pre-leased, 12 are under renovation, and 6 are freeing up through the relocation program below.
| Briarwood | Heritage | Williamsburg | Portfolio | |
|---|---|---|---|---|
| Total homes | 56 | 30 | 50 | 136 |
| Renovated today | 34 | 16 | 23 | 73 |
| + Legacy homes under construction | 4 | 1 | 1 | 6 |
| Expected by year-end | 38 | 17 | 24 | 79 (58%) |
| + Queued, if done by Dec. 31 | 4 | 1 | 1 | 6 |
| Stretch by year-end | 42 (75%) | 18 (60%) | 25 (50%) | 85 (63%) |
| Stage | Briarwood | Heritage | Williamsburg | Portfolio |
|---|---|---|---|---|
| Renovated & leased, Jan–Aug | 9 | 4 | 7 | 20 |
| Delivered Sep–Oct, leased or pre-leased | 7 | — | 2 | 9 |
| Under renovation today | 6 | 2 | 4 | 12 |
| Queued via relocation program | 4 | 1 | 1 | 6 |
| 2026 program total | 26 | 7 | 14 | 47 |
Six of the twelve homes under construction were already counted as renovated (re-renovations and homes mid-scope at August 31), so they add six to the cumulative count, not twelve. Three of the six queued homes do not vacate until mid-November, which leaves little room before BECU's year-end inspection, so we treat them as a stretch.
The 12-Home Relocation Program
To put the remaining BECU renovation capital to work before the construction line's year-end deadline, the partners approved in August a targeted program of 12 ninety-day renovation notices on legacy homes with the deepest gap to market, each with the Oregon-required relocation payment. Those twelve homes were renting for a combined $15,519/month, an average of $1,293. Renovated and re-leased at rents we are already achieving on comparable homes, we anticipate about $22,495/month — an increase of roughly $6,976/month (+45%), or ~$84K per year.
| Aug 6–7 | 12 homes proposed; approved by all co-owners |
| Mid-Aug | 90-day notices issued with relocation payment (one month's rent) |
| Incentive | $1,500 for moving within 30 days; $1,000 within 31–60 days |
| Aug 31–Oct | Early move-outs; renovations begin as homes free up |
| Mid-Nov | Final notice periods end |
| Stayed — moved into a renovated home | 3 |
| Vacated; renovated and re-leased | 1 |
| Vacated; under renovation now | 5 |
| Notice running; vacating by mid-November | 3 |
| Total | 12 |
Three households transferred into renovated homes in the same community (Briarwood 10163 → 10151 and 10220 → 10208; Heritage 7915-11 → 7915-7), and their former homes join the renovation queue. Relocation payments booked in August totaled $15.8K. We do not plan another round of this scale.
Renovated Homes Lease for About $480 More per Month
Every renovated home is leasing at a meaningful premium. Across all 2026 renovated leases, rents averaged $476 per month above prior rent. In September, four renovated homes moved in at an average rent of $1,950, and seven more renovated homes had signed leases at September 30 for October move-ins, averaging about $1,990. On an in-place basis at September 30, renovated homes averaged $1,914 against $1,428 for un-renovated homes, a ~$486 gap that also reflects unit mix; it holds at all three communities and is widest at Heritage (~$595).
| Home | Rent | Move-in |
|---|---|---|
| Briarwood 10085 · 2 BD | $1,850 | Sept. 10 |
| Williamsburg 6 · 2 BD | $1,950 | Sept. 11 |
| Heritage 7917-8 · 2 BD TH | $1,850 | Sept. 14 |
| Briarwood 10030 · 3 BD | $2,150 | Sept. 29 |
| Average (4) | $1,950 |
| Home | Rent | Move-in |
|---|---|---|
| Briarwood 9986 · 3 BD | $2,150 | Oct. 1 |
| Briarwood 10131 · 2 BD | $1,795 | Oct. 1 |
| Briarwood 10034 · 3 BD | $2,200 | Oct. 15 |
| Heritage 7919-3 · 2 BD TH | $1,749 | Oct. 2 |
| Heritage 7915-7 · 2 BD TH* | $1,795 | Oct. 15 |
| Williamsburg 36 · 2 BD | $1,995 | Oct. 2 |
| Williamsburg 30 · 3 BD | $2,250 | Oct. 9 |
| Average (7) | $1,991 |
Per the September 30, 2026 rent rolls. *Relocated resident transferring from 7915-11.
What the 12 homes under renovation should add
The twelve homes now under construction were renting for a combined $17,274/month before renovation. At current asking rents they would bring in about $23,985/month — roughly $6,700/month (~$80K/year) more. Five of these homes are in the relocation program above, so this figure overlaps with the ~$84K shown there rather than adding to it. Asking rents are targets, not signed leases.Interior completion dates have slipped because several selected finishes have uncertain manufacturer lead times. Meritus is substituting equivalent materials with reliable delivery and revising unit-by-unit completion dates accordingly. Getting these homes back online is the program's top near-term schedule priority.
$1.90 Million of Construction Capital Redirected to the Exteriors
In late July, ownership asked BECU to let us redirect unused unit-renovation budget toward building-wide capital needs, and BECU agreed. As of August 28, $1.90 million remained available on the construction line: $770K at Briarwood, $698K at Williamsburg and $431K at Heritage. Funds are locked to each property and paid as progress draws after BECU's inspector confirms the work, which must be complete and inspected by year-end to be funded.
Briarwood Townhomes
Exterior painting is complete on four buildings. As of October 30, beam wrapping, door trim and spigot repairs are underway, alongside dry-rot, garage-door trim and structural repairs. Brick whitewash is approved and scheduled. Trash-enclosure designs are being reworked with the hauler, with the goals of reducing illegal dumping and improving truck access.
Williamsburg Townhomes
As of October 30, front-door replacements are complete apart from touch-ups, building beam repairs are nearly done and sidewalk grinding is complete. Exterior painting, trim and dry-rot corrections continue, and brick-finish samples are being tested before application at scale. We have also asked Morrison to evaluate long-standing garage flooding in the buildings around units 9–26 and recommend a permanent drainage fix before new work is exposed to winter rain.
Heritage Townhomes
As of October 30, the buildings have been power washed and exterior painting starts this week. Siding repairs are progressing, and rear-yard areas at Heritage and Briarwood are the priority for exterior repairs.
Briarwood dwelling-unit conversion
The prior contractor on this conversion was removed from the project. Morrison's review found that structural components, required special inspections, shear walls and concrete work at the former garage opening were never completed, and the prior contractor has confirmed the work was left unfinished rather than built wrong. We had a Clackamas County inspection done on October 27 to document existing conditions, so that only work the county requires is redone, and we are now working through that process with the county and Morrison. We are waiting on Morrison's updated bid for the remaining work and will report the cost once it is confirmed. The original contract was about $202K, and change orders had already added roughly $30K.
Why exteriors, and why now
These are the improvements residents and prospects see first, and several of them — siding, roof, beams, paint — protect the buildings against water damage. They should support renovated-home rents and lower long-run repair costs. BECU has noted that exterior work is harder to tie to rent growth than interiors while still adding to the loan balance, so our 2027 model carries the fully drawn balance. Draw request #2 was submitted to BECU on October 29, ahead of BECU's inspection and the portfolio walkthrough on November 2.$1.00M of NOI Year-to-Date, 7.3% Behind Budget
Through September the portfolio produced $1.90M of income and $1.00M of NOI, against a budget of $2.03M and $1.08M. Interest-only debt service was $662K, leaving $338K of cash flow after debt service before capital spending, which is funded largely by the BECU line. Third-quarter NOI was $321K against a $387K budget, in the quarter with the most homes offline for renovation.
| July | August | September | Q3 2026 | Q3 budget | |
|---|---|---|---|---|---|
| Total income | $217,142 | $196,976 | $209,431 | $623,549 | $705,885 |
| Operating expenses | $97,156 | $86,851 | $118,637 | $302,644 | $318,871 |
| Net operating income | $119,986 | $110,125 | $90,794 | $320,905 | $387,013 |
What moved the quarter
The gap to budget comes mainly from homes offline for renovation: 12 were down at quarter-end. July income includes $16.8K of move-out charges billed to a former Heritage resident, which are receivables rather than collected cash and account for much of Heritage's lead over budget. August and September income is reduced by $19.2K of relocation payments, a cost of the renovation program. Netting both, third-quarter NOI is about $323K.September
September NOI was $91K against a $135K budget. Income was $29K under budget with homes offline, and expenses ran $15K over, partly because August vendor invoices that arrived late were booked in September. Taken together, August and September operating expenses were $9K under budget. A few September entries, including a likely ~$4.6K double count of Williamsburg sewer charges, are under review with Meritus, and we treat the year-to-date totals as more reliable than any single month.Operating Cash Went Back Into the Renovation Program
Through September the portfolio produced $338K of cash flow after debt service. At September 30 the properties held $340K of cash, and renovation invoices already paid from operating cash are being reimbursed through BECU's draw process; draw request #2 was submitted on October 29.
| Cash flow after debt service | $338,400 |
| BECU construction draws received | $319,133 |
| Total sources | $657,533 |
| Renovation, capital and non-operating spending | ($518,716) |
| Asset-management fees, net of ownership funding | ($7,179) |
| Remaining for working capital and cash | $131,638 |
How the cash was used
Renovation spending ran about $200K ahead of BECU draws. Operating cash covered contractor deposits that BECU does not fund, relocation payments, and invoices waiting on the lender's inspection-and-draw cycle, so this year's operating cash flow was reinvested in the value-add program. Much of it comes back as reimbursements through BECU's draw process, including draw request #2 submitted on October 29. No capital call is being requested.Property taxes and reserves
Property taxes have been accrued monthly and the cash is reserved. Heritage and Williamsburg will pay their 2026–27 taxes in full by the November 15 deadline and capture the 3% early-payment discount. Briarwood will pay in three installments and catch up to full annual payment in 2027. The partners agreed on October 26 to move accrued tax and insurance funds out of the operating accounts into a dedicated reserve account, with reserve activity shown in the monthly financials and biweekly cash reports shared with ownership. A capital-expenditure reserve sized by the partners will follow. Operating cash over the next two quarters goes first to tax installments, reserves and aged payables.| Item | Amount | Status |
|---|---|---|
| Current-resident rent 60+ days past due | $27.1K | Concentrated at Williamsburg ($17.9K) |
| Former-resident balances | ~$76K | With collections partner; write-off timing being set |
| Accounts payable 60+ days past due | $47.2K | Includes a $17.3K contractor invoice under review, largely past 90 days |
The 2027 Base Case Covers the Amortizing Payment at 1.42x
With renovated homes leased at the rents Meritus expects, 2027 portfolio NOI is projected at about $1.75M against fully drawn principal-and-interest payments of about $1.23M, or 1.42x coverage. That leaves roughly $520K per year before reserves and capital spending, which supports distributions once the 2027 transition is complete.
The first quarter of 2027 concentrates the transition: the loans begin amortizing and debt service rises by roughly $29K per month, the remaining Briarwood tax installments come due, and the homes now under renovation will still be leasing up. Our model shows Briarwood at about 1.05x on its Q4 2026 lender coverage test against 1.20x required; BECU has indicated a miss would roll forward to the 2027 test, by which point the renovated Briarwood homes will be leased. We will fund reserves before resuming distributions in that window.
| Milestone | Target |
|---|---|
| Exterior and interior renovations complete, inspected and drawn from BECU | Dec 2026 – Jan 2027 |
| Renovated homes leased; portfolio occupancy back above ~93% | Q1 2027 |
| 2026–27 property taxes fully paid, including Briarwood installments | May 2027 |
| Dedicated reserve account funded for taxes, insurance and capex, with ongoing monthly funding | Q2 2027 |
| Two consecutive months covering amortizing debt service at ≥1.25x | Q2 2027 |
BECU year-end construction deadline
BECU will not fund work completed after the renovation maturity, so material delays or the Briarwood change order could shift costs to operations. We track draws every two weeks.
Williamsburg — NOI, delinquency and drainage
Williamsburg is $73K behind its NOI budget, carries most of the 60+ day delinquency, and has garage drainage costs not yet known.