PHOENIX-Though the National Multi Housing Council’s Student Housing Conference & Exposition has brought together an esteemed group of speakers to highly trends and issues in student housing, one of the more compelling panels covered an anatomy of an actual REO deal. The panel entitled “Analysis of a Recently Closed Deal: Buyer and Seller Discuss What Happened” brought together the seller of a distressed student housing asset, head of the company that bought the asset, and the broker who arranged it all.

The main player in the story was the asset itself, Metro Point Lofts in Atlanta, GA. Built during the mid-2000s at a cost north of $100 million, the 368-unit, 1214-bed project was developed to serve Georgia Institute of Technology. However, a master lease signed by a nearby vocational school caused some issues. That master lease meant 50% of Metro Point was leased by students from this other school, and those students didn’t get along with the Georgia Tech students. Growing security problems led to dwindling leases – and Metro Point Lofts went into foreclosure in 2008, being 10% occupied. Noted Samuel Jones, senior vice president of Capmark Bank (which took possession of the asset): “I couldn’t imagine any structure like that housing any student.”

There was little doubt that Metro Point needed an influx of capital and outstanding management, not to mention negotiations to get out of the master lease, to make it a workable project.  Despite this, Jones acknowledged he received 20 to 30 unsolicited offers for the project, even before it hit the market, offers he declined. Instead, Capmark Bank turned to Apartment Realty Advisor’s National Student Housing Group and Chris Epp to help out. ARA brought it to market and received offers ranging from $5 million to $35 million for the asset.

Ultimately the best and final came down to an institutional investor and Cardinal Group Investments. However, none of this happened immediately. “We looked at this deal for eight to nine months,” said Cardinal Group’s principal Eric Frank. Cardinal Group was no stranger to Georgia, having bought the 154-unit, 495-bed University Apartments on Riverbend in Athens, GA. But in examining Metro Point Lofts, Franks said his company had to look at it from a development angle. The financial books were in a mess, he added. The company also did a great deal of research about the assets image and reputation in the community. As part of the research, Cardinal Group also examined competing assets.

“We took a tour of one of them; it was further off campus and was 100% leased and charging twice the rents,” Frank commented. “We said if we couldn’t turn (Metro Point Lofts) around to beat that other one, we didn’t belong in the business.”

Cardinal Group put in its bid of just over $35 million, with Capmark Bank accepting it for a couple of reasons.  First was that Cardinal Group was more hands-on than the institutional investor. “They examined every single nook and cranny of that property,” Jones said. Second, Cardinal Group’s presentation was more professional and well thought-out.

Buyer and seller closed on the deal in August 2010, and the first thing Cardinal Group did was to bring in an expert turnaround team and also an extra management team. It also changed the name of the property to West Mar Student Lofts. Capmark Bank had already terminated the master lease with the vocational school, meaning internal student battles were a thing of the past.

Then the new owner plowed $2.5 million into upgrades. The result was a switch from student housing blacklisted from the Georgia Tech to one that started attracting interest from students (and eventually ended up back on Georgia Tech’s housing list).  At the start of the 2011 school year, West Mar Student Lofts achieved 100% occupancy – and had a lengthy waiting list.

Jones acknowledged his company doesn’t have much of an opportunity to do a post mortem on the deals they handle. But in this case, he was glad to be part of the success story of a run-down, derelict student housing project that got a second chance. “I’m happy for Eric and Cardinal,” he added.

To finish up, Epps asked the buyer and seller if deals similar to the former Metro Point Lofts were on the market. Jones and Cardinal acknowledged Metro Point/West Mar was a one-of-a-kind deal, namely because foreclosed student housing is considered somewhat rare, especially when it’s in such poor shape.