Hey Wso,
I'm wondering if anyone here has executed a MF redevelopment play? At this point in the cycle we are seeing these deals happen more frequently. I'm curious as to how developers go about executing them?
Do they pay tenants to vacate? Plan ahead based on rollover(take the hit on vacant units waiting for other tenants to vacate)? Most importantly how are they financing these deals? They sound very capital intensive and I'm trying to figure out how do these things pencil out.
Would love to hear input from someone that has been involved in one or executed a deal like this.
Are you talking about taking a deal down to the studs and then blowing it out? I've seen a few of the REITs do it (UDR and Aimco immediately jump to mind) mainly because their balance sheet can handle it. We've (large owner/operator with a fund and some fee managed clients) executed a few for some fee clients, and I know it was a nightmare but I wasn't personally involved. Seems like a headache and very risky.
I'd be interested in hearing others' perspectives on this.
Exactly. I think many of these projects will be low-income properties in prime areas - with that said some of these low-income complexes may have month-to-month lease structures. I think that would help greatly, but I don't believe that to be the case on each deal like this.
Below are two links to the before and after of a UDR deal in Alexandria, VA (DC MSA) that I was thinking of. Really cool project, but it took them a while to do it. It was shitty affordable housing in a rapidly gentrifying area (Del Ray submarket is rock solid) that they took down to the studs and pimped it out.
Before: http://alextimes.com/2010/09/much-needed-redevelopment-to-snuff-out-m/
After: https://www.udr.com/washington-dc-apartments/alexandria/delray-tower/
On the Aimco deal, it was in Venice Beach and was a total clusterfuck that took decades to resolve. There were neighborhood objections, historic preservation objections, Ellis Act issues, and then some. Total shit show that had to have costs them a fortune to get through.
Wikipedia: https://en.wikipedia.org/wiki/Lincoln_Place_Apartment_Homes
More Details: https://yovenice.com/2012/10/15/aimco-lincoln-place-redevelopment-moves…
Today: http://www.lincolnplaceapthomes.com/
Also, if the building is a garden-style building, you can just do the redev one building at a time. If you're redoing a high-rise or mid-rise, you're going to have to vacate the whole building before starting, and that may include forced move-outs (not renewing folks leases) and offering incentives (cash and paying for movers) to get folks out. Even then, you'll likely get hold outs from folks trying to squeeze you for every nickle (similar to consolidating a busted condo deal) and granny who has lived there for 25+ years and doesn't want to / can't afford to move.
I feel like you would need to either be a REIT or hit a 20%+ IRR / a 3.0x+ multiple to make the economics and risk of something like that make sense.
We just completed a 3-year gut rehab of a 400 unit Class C building (turning it into A-/B+), also in Alexandria, VA. We considered vacating the whole building, but ultimately found that doing the renovation on turn was the least risky method (definitely a risk-averse group).
I have worked with a large operator who did rehabs, and they exclusively did the rehabs one unit at a time on turnover. At my current job doing multifamily lending, almost all rehab operators do the same thing. It is just a lot less risky to do it that way.
Trump got sued early on over his treatment of tenants he wanted out. You could check it out as a checklist of things not to do.
I've worked at a previous company that did upzoning/demo/rebuild deals in a primary, rent controlled submarket. Very specific legal issues for tenant buyouts and no ability to terminate existing leases without voluntary tenant cooperation. Bottom line, in almost all cases we UW, you could build the tenant buyout fees into the construction loan budget (think $10k+ per unit) but its a much better ROC to secure the entitlements and flip it. We were able to pencil a decent developer profit on a few in the best areas, but you're absolutely right they are cash flow anemic and heavy on the backend exit cap.
More trad value add MFR deals will do an amenity and exterior rehab first to reposition the asset in the market then renovate interiors at unit turnover only ever hoping to get to 75+% renovated in 3-5 years before exiting. Not the worst thing as it leaves some 'meat on the bone' for the next owner...
PS. Lincoln Place was an absolute nightmare of a process but for patient capital its a home run. I imagine monthly GPR went from something like $700k before to close to $1.75MM+ now. Month after month after month.
Good shit; thanks for sharing.
Oh man, I would love to own Lincoln Place (buying a deal nearby currently), and you definitely needed the right group and capital structure (permanent capital) to take that one from soup to nuts. Our finite life, current income focused, value-add fund couldn't take something like that down, but if you're balance sheet could handle something like that then you can absolutely crush it, as I'm sure Aimco has.
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