Apartment Finance Today

Cover story

2009 Deals of the Year

The Mother of Invention

APARTMENT FINANCE TODAY • November/December 2009

BY jerry ascierto

A YEAR LIKE 2009 FORCED MANY DEALMAKERS TO THINK OUTSIDE OF THE BOX.

As property values continued to plummet—on average from $113,000 a unit in 2008 to $80,000 per unit in the second quarter of 2009, according to Reis—lenders and equity providers grew increasingly stingy as the year wore on.

This year signified the promise of distressed assets and sellers. For the most part, only those forced to sell did so this year, with large institutions in need of cash the active sellers. In fact, Post Properties, AIMCO, and Northwestern Mutual combined sold 10 of the 20 largest deals this year.

The deals highlighted here each have their own story to tell, but the stories are woven together by one common theme—creativity. Many buyers took new steps, such as acquiring their first failed condo deals or purchasing their first distressed notes. In all, the 2009 Deals of the Year exhibit a certain stubborn resolve, an on-the-fly ingenuity that refused to concede defeat, despite the worst recession in years.

UNDER $10 MILLION

Solona Village, Naples, Fla.

The 44-unit Solona Village Apartments sold for more than $2.3 million this year, a steep discount from the $7.3 million paid for it in 2006. The seller was Great Neck, N.Y.-based BRT Realty Trust, a hard-money lender that foreclosed on the property in late 2008, after the condo conversion attempt failed. No units were ever sold.

The deal, on the market for fewer than 30 days, received 48 offers. A Florida-based private partnership purchased the sevenyear- old property with 35 percent down. The rest of the financing came from the seller, which offered a two-year interestonly loan to the buyer to get the deal done—essentially replacing a nonperforming asset with a new performing loan. The property was 90 percent occupied 45 days after the deal closed and the buyer was gearing to refinance or sell.

University Village at the Coast, Myrtle Beach, N.C.

The Preiss Co. (TPCO) purchased Campus Pointe, a 432-bed student housing property, in January for $6.2 million. The property, built in 2002, was originally master-leased to Coastal Carolina University, but due to a late delivery the contract was cancelled. The property was owned by Wachovia and serviced by CWCapital.

The property was only 50 percent occupied for the 2009-2010 school year when Raleigh, N.C.-based TPCO purchased the property for 50 percent of the original note. The company obtained a 70 percent LTV full-recourse loan from RBC that allowed one year of interest-only, and the remaining 30 percent in equity came from high net worth investors. After $1 million in capital improvements, the property, renamed University Village at the Coast, is now 94 percent occupied. TPCO was in talks with lenders to do a cash-out refinancing just 9 months after buying the asset.

Remington Place, Denver

The 119-unit Remington Place was sold by Denver-based Simpson Housing for $8.4 million, or $70,966 per unit, in July.

The buyer, Fort Collins, Colo.-based George Van Buren, represented a 1031 exchange and was under application with Fannie Mae for the debt piece, but the fluctuating 10-year Treasury and lender spread made things difficult. The debt service coverage requirements wouldn’t allow the borrower to go much beyond a 6 percent rate. Meanwhile, interest rates grew from 5.9 percent to 6.4 percent during July, and the 180-day 1031 exchange period was rapidly expiring.

So, the broker proposed a structure whereby for every basis point increase in the interest rate, the purchase price was reduced. The seller then agreed to share 70 percent of the difference so that the buyer’s price went down 70 cents on every dollar of decrease in the loan amount. In the end, the buyer locked a 6.04 percent rate on July 28, and the transaction closed on the last business day of the buyer’s 180-day 1031 exchange period.

LaMar Village, Arvada Colo.

The $9.2 million sale of the 182-unit LaMar Village required some creative maneuvering. The property, built in phases from the late 1970s to the early 1980s, had an existing $3.75 million loan with a sizable pre-payment penalty of roughly $600,000 for the seller, locally-based LaMar Village Associates. The LTV ratio remaining on the loan was 42 percent, leaving an equity gap of 58 percent. The bank that made the loan wouldn’t allow a second loan on the property so broker ARA worked out a deal. The buyer, a California-based private investor, agreed to buy a 58 percent ownership interest in the property, with an understanding that it would purchase the remaining 42 percent once the property was refinanced when the note came due in May 2015. The seller technically retained 42 percent of the deal but had no interest in the property except for a monthly payment that steps up until May 2015.

$17 MILLION TO $35 MILLION

Sky View Ranch, Gilbert, Ariz.

In late June, Memphis, Tenn.-based Mid-America Apartment Communities bought the 232-unit Sky View Ranch for $17.4 million, or about $75,000 per unit—a deep discount from the estimated value of $110,000 per unit. The complex, which was built in 2007, was only 76 percent occupied at the time of the sale. The seller, San Diego-based Fairfield Residential, approached Mid-America, saying it would agree to the low price if the deal could close by the end of the second quarter.

Broadstone Domaine, Seattle

Alliance Residential purchased Broadstone Domaine, a 93-unit partially-constructed condo deal, for $19.5 million in late May. Phoenix-based Alliance bought the note at a discount from a senior lender, foreclosed on the property, and completed the build (mostly finishes including cabinets and flooring) before leasing it up. And the company did it with all equity. The project was initially developed by Intracorp Seattle in 2007 and was foreclosed in October 2008 by KeyBank and LPSL Corporate Services, who said that the developer owed them $20.6 million in principal and interest. Alliance got wind of the transaction before it went to market through one of its lender relationships.

Harbour Key Apartments, Miami

In March, the Coral Gables, Fla.-based CFH Group partnered with a local investor, Key Biscayne, Fla.-based Sheldon Lowe, to purchase the 300-unit Harbour Key Apartments for $22.9 million. After reviewing their prospects on the capital markets, the buyers decided to assume a $17.4 million CMBS loan with Wells Fargo Bank. The loan has a fixed rate of 5.97 percent and matures in November 2012.

The buyers put down roughly $5.5 million, effectively giving them a 76 percent LTV ratio on the debt. Had they gone with a Fannie Mae or Freddie Mac loan, the LTV ratio probably would have been closer to 70 percent, according to Nathan Vedrani, director of acquisitions for the CFH Group. The seller was Miami-based Kendall Courtyards, which purchased the 40-year-old complex in 1997 for $11 million and rehabbed it.

Verona Apartments, Bellevue, Wash.

Alexandria, Va.-based AvalonBay Communities opened an opportunity fund in the second quarter of 2009 and subsequently purchased Verona Apartments in May. The deal was the first REIT acquisition of 2009. The $33.1 million deal represented a steep discount—45 percent below the firm’s estimated replacement cost of the community. The seller of the 220-unit property was Milwaukee-based Northwestern Mutual Life Insurance Co., which acquired the 15-year-old property in early 2000 for about $24.5 million.

$35 MILLION TO $90 MILLION

Campbell Arms, Middletowne Apartments, Cutler Manor, Cutler Meadows, New Horizons, Miami

A carefully orchestrated transaction by the Boston-based Preservation of Affordable Housing (POAH) preserved more than 800 units of affordable housing. The apartments became threatened when Greater Miami Neighborhoods, a large nonprofit developer and owner, went out of business in January 2008. POAH used a variety of tools, including a well-managed bankruptcy proceeding, buttressing of the seller, and cross-subsidization of the properties, to acquire five developments.

The seller and POAH worked together on a court-supervised bankruptcy. POAH structured the “earnest money” deposits on the property so they could be used to fund the seller’s operations, keeping the property going on a skeleton crew to allow for a Chapter 11 restructuring bankruptcy rather than a liquidation bankruptcy. The deal involved 846 units and cost nearly $49 million, which includes new and restructured debt.

Zoso Flats, Arlington, Va.

The sale of Zoso Flats, a 114-unit mixeduse property built in 2007, was fraught with complexity. The developer, Arlington, Va.-based Ed Peete Co., designed it as condos, but shifted to rentals when the market went south in 2007. Simpson Housing agreed to buy the property in July 2008 and was brought on to manage the property until the sale closed.

But the deal didn’t close until July 2009 since the closing was contingent on final build-out and lease-up. Complicating the deal, the general contractor Signet Realty Construction placed between $7 million and $8 million in liens on the property in April. The contract included several creative provisions, including a partial paydown of the construction and mezzanine loans, two separate intercreditor agreements to secure a sizable earnest money deposit, and six different escrow accounts for various post-contract items. The agreement also included a hybrid master-leaseback structure for the 20,000 square feet of retail space. While the price was undisclosed, Real Capital Analytics estimates the deal at roughly $70 million.

MORE THAN $90 MILLION

[Editor’s Note: As of early October, only three deals of more than $90 million closed in 2009, according to Real Capital Analytics.]

Fox Run Apartments, Plainsboro, N.J.

The third-largest deal of 2009 was for the 776-unit Fox Run Apartments, built in 1973. The buyers were a joint venture between New York-based Vantage Properties and Angelo, Gordon & Co., and the seller was Denver-based AIMCO. While the sales price was not disclosed, Real Capital Analytics estimates the price to be about $90 million, with a cap rate of 7.3 percent.

Gallery at NoHo Commons, Los Angeles

The second-largest deal of 2009 was the $96 million acquisition of the 483-unit Gallery at NoHo Commons in North Hollywood acquired by Addison, Texasbased Behringer Harvard. The final price was a steep drop-off from the whopping $140 million that its owner, Fairfield Residential, was asking just two years ago when the complex first came online.

Meridian at Pentagon City, Arlington, Va.

The largest deal of the year was the $109.5 million purchase of Warwick House, a 533-unit development built in 2002. The buyers were a joint venture between Zurich, Switzerland-based UBS Group and Arlington, Va.-based Paradigm Cos., and the seller was Northwestern Mutual Life. The development, now named Meridian at Pentagon City, was sold in April with a cap rate of 6.5 percent.

—Additional reporting by Donna Kimura