The Purchase Opportunity and Strategy:
This 232-unit property presented an investment opportunity that was directly in Equilibrium’s wheelhouse. The property suffered from excessive deferred maintenance and was foreclosed upon. Furthermore, it was in close proximity to several Equilibrium properties, so we therefore had refined local knowledge of the market and could leverage our existing infrastructure. We also liked the specific location of the property, as it is located in a transitional area very close to major employers and between two prominent and affluent Tucson neighborhoods (downtown and the Catalina foothills).
The prior owner’s inability to make necessary repairs, including the repair of all 116 balconies, initiated a downward spiral in property condition and occupancy. As a result, the prior owner was not able to make mortgage payments and the property ultimately entered receivership and foreclosure. Given the prior performance of the property, conventional financing was not available for our purchase: we utilized bridge financing and acquired the property on June 14th 2014.
The property met all of our basic underwriting criteria, including breaking even at 60% occupancy and the total purchase price, together with renovation expenditures, was well below the cost of new construction. In addition, particularly given the location of the property, ample upside could be achieved by implementing the needed renovation/rehabilitation as well as undertaking certain other improvements that would result in a repositioning of the property.
Given the above, our strategy for the property was to work diligently to get the property to stabilization as promptly as possible and to replace the bridge financing with conventional financing, and in so doing to return our investors’ initial capital investments. Following stabilization, we would continue to make accretive improvements in an effort to reposition and improve the overall quality of the property.
FINANCIAL OVERVIEW
INITIAL PURCHASE PRICE:
$5.68
MILLION
PROPERTY REFINANCE VALUE:
$10.8
MILLION
The Challenge:
Due to the property being in receivership/foreclosure and the prior owner’s failure to operate effectively, we were inheriting a property that required immediate coordinated repairs and re-tenanting. We recognized that we should expect revenues to fall following acquisition, as leasing standards for the property had been well below our standards. As we anticipated, the property experienced a large number of move outs (notices to vacate, evictions and abandonment) over the first several months of ownership, as we worked hard to improve the quality of tenant and overall reputation of the property.
In addition to the challenge to revenues described above, we also worked to reduce operating expenses, which were materially higher than our pro forma budget. We found that we were able to find savings by consolidating the delivery of certain services with our other portfolio properties and also rebidding out the delivery of contracted services.
Implementation and Property Rehab:
Deferred maintenance was undertaken and other improvements were implemented as follows:
- Exterior Painting (Trim), Carport & Dumpster Enclosures
- Sidewalks/Concrete Steps/Landscaping/Signage/Perimeter Fencing/Roof
- Pool Resurfacing, Furniture & Equipment
- All exterior balconies and Landings
- Down Units Renovation & Rental
- Water Heaters/Shut Off Valves and Toilet Rebate Program
Before:
AFTER:
The Results:
The property’s capital and operating expense budgets were set prior to acquisition based upon our due diligence of the property, and were adhered to from the onset. We accomplished revenue growth by increasing overall property occupancy and by increasing rents for a small number of units that we decided to upgrade. At the same time that we increased revenues, we were able to reduce operating expenses through focused and detailed property management. For instance, by implementing the toilet low flow rebate program, we achieved water savings of approximately 30% and in addition we received a $100 rebate for each toilet that we replaced. These efforts to increase revenue while reducing operating cost resulted in reaching stabilization in less than 24 months. With stabilization accomplished, we refinanced the property and provided a full return of capital to our investors in month 24. The refinance value for the property was $10.9MM, well above the $5.86MM initial purchase price.
Repositioning:
The property remains in our portfolio and we believe that there is additional upside to be achieved by undertaking certain additional accretive property improvements. The improvements include upgrading second floor two-bedroom units (all already contain skylights), adding exterior space to our upgraded community clubhouse and revamping our outdated tennis court area into a more usable multi-faceted, all-inclusive recreational space. With these and other revenue generating improvements, we expect that the overall value of the repositioned property will be further enhanced.