SPECIAL FOCUS: AFT’s Top Deals of 2007

APARTMENT FINANCE TODAY • NOVEMBER/DECEMBER 2007

Quick Turnaround

Kushner’s multifamily portfolio sale is the largest transaction in New Jersey’s history.

By Jerry Ascierto

It took Charles Kushner 25 years to assemble the 16,784 units in his portfolio—and just one weekend to sell them off.

In June, Kushner Cos. agreed to sell 86 market-rate apartment complexes to a joint venture between Morgan Properties and AIG Global Real Estate Investment Corp. for approximately $1.9 billion.

The properties spanned four states—New Jersey, Pennsylvania, Delaware, and New York—though the bulk of the units, more than 75 percent, are located in New Jersey. The number of units as well as the overall price makes it the largest multifamily transaction in New Jersey’s history. The deal was consummated very quickly, especially given the magnitude of the transaction. In fact, the initial contracts were signed over a single weekend.

The Kushner Cos.’ broker, CB Richard Ellis, received the offer on Friday, June 22, but it was contingent on the Kushner Cos. agreeing not to review any other bids. Kushner responded that as long as contracts were signed before Monday, it wouldn’t look at any additional bids.

“Sunday night at 11:30 p.m. we all went home and contracts were signed,” said Alan Hammer, senior portfolio manager of the Kushner Cos. and a partner at law firm WolfBlock, which represented Kushner.

The deal closed within three months of those contracts being signed. “Usually, three months is a tight time if you sell one building,” said Hammer. “We sold 86 buildings in 90 days, start to finish. I’ve never seen a deal move so quickly.”

For Morgan Properties, the acquisition more than doubled an existing portfolio of about 14,000 units, and gave it a presence in northern New Jersey, a tough market to crack. “It’s a market we always wanted to be in; there are high barriers of entry, good rent growth, good demographics,” said David Koffler, senior vice president of asset management for Morgan Properties.

But there are few institutional owners in the area, making bulk acquisitions difficult. “This is irreplaceable real estate. It’s not like buying in the South or West, where there’s more land,” he said. “There’s no more land in north Jersey.”

While the deal was done quickly, it wasn’t all smooth sailing. The timing of the transaction made financing a challenge. “The real hurdle was the credit crunch; the conduit market sort of disappeared in the middle of our deal,” said Koffler.

Interest rates were in flux as the company put the deal together, with the London Interbank Offered Rate soaring and the yields on Treasuries plummeting through the summer. “It changed the way our prepayments were calculated; it changed a lot of the dynamics of the financing,” Koffler said.

Morgan assumed $480 million of existing debt on the properties. Fannie Mae provided a $1 billion loan through Wachovia, and Wachovia kicked in a $125 million mezzanine loan.

The joint-venture partners provided the remaining financing, 20 percent of the purchase price, or $295 million, in equity. This is the seventh, and largest, deal the company has done through a joint venture with equity partner AIG Global Real Estate. Morgan said it plans to spend about $120 million renovating many of the properties.

The tight timeframe was also challenging due to New Jersey’s regulatory environment. Many New Jersey cities require certificates of continuing occupancy to change hands when properties are sold, and to get those certificates, inspections needed to be done. “Some [cities] required that we did work before closing, in some cases substantial work, before getting the certificates,” Hammer said.

For instance, one apartment complex’s fire alarm system had to be rewired the night before the deal closed. So Kushner and the buyers hired several crews of electricians to work from 4 p.m. to 10 p.m. rewiring the system. At 9 the next morning, the certificate of occupancy was issued.

Not only was the deal done quickly, it was done during a difficult time. The deal was struck at the market’s peak, and proceeded through a challenging financing environment. “It was a great team effort to do a $2 billion deal in three months,” said Koffler. “And to pull this off in the middle of a credit crisis was huge.”