SPECIAL FOCUS: AFT’s Top Deals of 2007

APARTMENT FINANCE TODAY • NOVEMBER/DECEMBER 2007

Top Deals of the Year

Big transactions broke the bank in 2007.

By Jerry Ascierto

The year 2007 came in like a lion for the multifamily industry.

The year bore witness to some extremely large deals, many of which were struck at the peak of the market, before the capital crisis resulting from the subprime fallout made the late summer and early fall a difficult time to get deals done.

For instance, when Bascom Arizona Ventures, LLC, put 12 of its apartment communities, totaling 5,178 units, on the block this spring, broker Colliers International thought it would have to market and sell each property separately. But bids for the entire portfolio flooded in, and on June 2, the Bethany Group won the bidding with an offer of almost $428 million, making the transaction the largest Arizona multifamily deal ever. (For more on this deal, see Bascom Pays Up in Arizona’s Biggest Deal.)

One 2007 deal was famous for not getting done. The proposed $1.3 billion sale of the massive Starrett City community in Brooklyn, N.Y., made headlines across the country as politicians, tenant organizations, and ultimately the Department of Housing and Urban Development sparred with potential buyer, Clipper Equity. At issue was the buyer’s ability to keep rents at the nation’s largest subsidized housing development affordable to existing tenants.

After two failed bids, the deal has been given new life recently, with the emergence of nonprofit affordable housing provider The Provident Group as the lead buyer. The company is seeking to revive talks with Starrett City Associates this winter. (For more on this deal, see Blocked While on the Block.)

Many companies took advantage of the aggressive terms and rates seen earlier this year. When Waterton Associates purchased the Presidential Towers in Chicago for $475 million, it did so through an aggressive conduit execution. The company secured a $325 million loan through Bank of America—an interestonly loan with a seven-year term, with an interest rate of less than 5.4 percent.

“If it was in today’s environment, we wouldn’t be able to get it done,” said Mark Stern, executive vice president of acquisitions for the Chicago-based Waterton Associates, LLC. (For more on this deal, see Topping Out.)

Some deals had to scramble to piece together financing once the market for commercial mortgagebacked securities (CMBS) cooled off. The purchase of the Archstone-Smith portfolio by a partnership of Tishman Speyer Properties and Lehman Brothers Holdings, Inc., for instance, tapped both Fannie Mae and Freddie Mac debt financing, totaling almost a combined $9 billion, after initial plans to use a conduit execution were scrapped.

The companies extended the deal’s timeframe when the capital markets hiccuped over the summer, and for a time, some industry watchers wondered whether the transaction would ever come to fruition. “That deal was bound for conduit land. If that deal had happened last year, we wouldn’t have seen it,” said Mike May, Freddie Mac’s senior vice president of multifamily originations.

While lenders grew more conservative in underwriting permanent debt, the market for shorter-term construction loans remained healthy throughout the year. Developer Forest City Enterprises secured a $630 million construction loan in August for Ridge Hill in Yonkers, a massive 81-acre mixeduse project featuring 1,000 residential units (135 units of affordable housing, and 200 units set aside for seniors), and 1.3 million square feet of retail space.

The Hakimian Organization secured a $376 million construction loan in May for 75 Wall Street, a conversion of a 600,000-square foot office building into a mixed-use, 350- luxury condo development that also features a 250-unit hotel. It’s believed to be the largest commercial-to-residential conversion in the history of lower Manhattan.

Seniors housing continued to be a hot property type in 2007. The Merrill Gardens portfolio, a 21-property, 1,927-unit seniors housing portfolio including developments in Georgia, Florida, Louisiana, Oklahoma, Tennessee, and Texas, was sold for $217.2 million to Chartwell Seniors Housing. Collateral Real Estate Capital funded the deal through Freddie Mac’s Seniors Housing Standard Delivery loan product. Each loan in the package featured a 10-year term, plus a one-year extension period, with five years of interest- only, followed by a 30-year amortization schedule. The fixed-rate loans closed with interest rates in the upper 5 percent range. The loans were delivered from quote to close in 30 days.

In Los Angeles, Kennedy Wilson Multifamily Management Group and Wachovia Development Corp. purchased City Heights, the largest apartment property in the Koreatown section of the city, and the second-largest apartment community in Los Angeles. City Heights, a 687-unit, 8.2-acre development, was sold for more than $120 million by Essex Property Trust, and Kennedy Wilson intends to invest another $11 million in renovations.

The meltdown of the subprime single-family mortgage industry has been a double-edged sword for the multifamily industry. On one hand, a wave of single- family foreclosures sent more renters into the market, raising rents and occupancy rates for many markets throughout the country.

But on the other hand, investor confidence in real estate became tempered, and that lack of enthusiasm translated to a less favorable debt-financing environment for multifamily developers. The meltdown in the subprime mortgage industry prompted ratings agencies to slash ratings on CMBS, which made conduit lenders grow extremely conservative. For a time over the summer, conduit lenders weren’t even able to quote deals, preferring instead to wait on the sidelines while the turmoil in the capital markets played out.

As the capital markets settle down, analysts project that 2008 will be a strong year for the industry, though as 2007 proved, it’s always a good policy to brace for the worst while hoping for the best.