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Summer School

APARTMENT FINANCE TODAY • June 2008

Kennedy Wilson's acq/rehab of Summer House holds important lessons for developers.

BY DANA ENFINGER

Alameda, Calif. — “It looked like something out of Baghdad,” said Eddie Ring, senior managing director of Kennedy Wilson Multifamily Group.

Ring remembered the first time he saw the 615-unit property that his Los Angeles-based firm had purchased on this island community buttressed against Oakland in September 2005. The complex, Harbor Island, was built in 1965 as low-cost housing for personnel at Alameda Point Naval Air Station.

“I was like, ‘We’re going to buy this?’” recalled Ring. “Just all these old yellow block buildings located next to beautiful million-dollar homes. It looked like a tornado had come through the neighborhood and spared everything but this property.”

A gem waiting to be polished

The firm knew it had a diamondin- the-rough though, because the apartments were located in the epicenter of a vibrant $100 million renaissance taking place in Alameda and in Oakland’s Jack London Square. A new development of single-family homes was being built nearby.

By the time Kennedy Wilson entered the picture to buy the nearly 20-acre property for $88 million, the development had been boarded up by the owner, the Fifteen Group, since 2003.

Previously, Harbor Island was a haven for drug activity and other crimes. Local restaurants that made deliveries refused to send drivers to the property. The Department of Housing and Urban Development (HUD) removed all tenants who were using Sec. 8 vouchers shortly before the buildings were boarded up because, according to HUD, it was unfit to live in. Those seeking to use Sec. 8 vouchers were sent elsewhere. Once the owner boarded up Harbor Island, the crime rate in Alameda plummeted 38 percent. At one time, more than half of the city’s 911 calls came from the apartment complex.

‘A real ruckus’

The Fifteen Group originally had wanted to renovate the property in 2004. While it sought entitlements from the city to redevelop the property, the owners evicted more than 2,000 low-income and minority tenants, causing an uproar in the Alameda Unified School District. Because a number of the residents at the complex were children, this decision took a lot of children out the local schools. Schools get some funding based on how many kids fill the seats.

“It was a real ruckus,” said Ring. “The problem was that the owner didn’t consult with Alameda decisionmakers.”

The ownership decided it was best to get out of Dodge while the getting was good and placed the property on the sales block in 2005.

“The challenge for us was how to enter the climate that had been created,” said Ring.

A part of the climate in Alameda is that officials have been limiting new multifamily construction since the early 1970s, as a result of a local ballot initiative known as Measure A. The thinking was that because many of the single-family homes in the area were rentals, they provided enough rental housing to meet local demand. Plus, officials and citizens didn’t like the idea of large apartment complexes ruining the charm of the city’s trademark Victorian homes.

Nothing new under the sun

As a result, not many new apartments exist in Alameda. Most were built in the 1960s. The apartments attaining the highest rents are located on the city’s waterfront.

“There was a built-in supply constraint for us,” noted Ring. “No, our apartments aren’t new, but they ended up looking like it.”

But first on the agenda, before construction could begin, was outreach. Kennedy Wilson started making phone calls and setting up meetings.

“We reached out to everybody in the community,” recalled Ring. “The redevelopment agency, the mayor’s office, the housing authority, the planning department. We told them what we were doing. We really tried to stress over and over again that we were going to connect the project to the rest of the community. Originally, we had a San Francisco architect, but decided to hire one from Alameda for this project. We also used local vendors to the extent possible. That helped to allay fears.”

Once the developers rolled up their sleeves, they discovered that much of the deterioration was cosmetic. The firm decided to rename the development Summer House, in homage to the fact that at one time many San Franciscans owned summer homes in Alameda.

Kennedy Wilson had foreseen that it would need to be especially communicative with the locals, but found that it had to work extra hard to convince city officials that the upgrades at Summer House were only renovations and not new construction. Rehabilitation was done in four phases, with a few minor renovations left to do as of early May.

“Former residents were stopping by the apartments,” said Rosa Chong, Summer House’s community director. “They wanted to see how they had been transformed. They were blown away.”

The yellow block exterior is now slate grey siding with whitewash trim. Each of the 516 units has either a patio or balcony. The complex offers a dizzying array of floor plans: 11 in all. Most of the units are two-bedroom apartments. Six are four-bedroom units. The interiors reflect the beach house theme with white cabinets and carpet the color of a sea lion. The property was nearly 70 percent leased at press time.

“We are definitely targeting renters by necessity,” said Ring. “This is the tier underneath the renters-by-choice who want ultra-luxury.”

Rents at the property are around $1,550 for a two-bedroom property “versus about $3,000, which is what we are seeing for this type of quality,” said Ring.

The project includes a fitness center, a small business center, barbecue grills, a playground, and a pool— which already existed but now is heated.

To put the deal together, the company had to design a complex-tiered equity structure allocated between four investors, one of which provided preferred equity. Bank of America provided the construction bridge financing to allow for the $35 million redevelopment. In March 2006, the deal was recapitalized, adding RREEF as a new equity partner and removing the preferred equity partner. At the same time, Bank of America provided an additional $5 million of debt financing.

In December 2007, Kennedy Wilson sold its interest in the property to RREEF for $154 million. Kennedy Wilson will continue to be connected with Summer House as property manager.