NEWPORT BEACH, CA—The financing of “fractured” condominiums needs to be structured in a manner that gives the lender all of its normal underwriting sizing guidelines, while also providing the operator the flexibility to execute its business plan, mortgage-banking firm MetroGroup Realty Finance's VP Scott Botsford tells GlobeSt.com.

There has long been a stigma surrounding these commercial condominiums—projects where only a portion of units were sold as originally intended and the remaining units leased due to slow sales, often brought on by a downturn in market conditions. As the economy recovery continues and the market remains strong, there has been an increased interest in acquiring these properties, but due to their complicated nature, financing can be difficult to secure, even for highly promising opportunities.

MetroGroup recently secured $7.5 million in acquisition financing for Kihei Commercial Center, a multi-tenant industrial/flex complex in Kihei, HI, on the island of Maui, on behalf of a real estate investment and management company based in Irvine, CA. The transaction is an example of a fractured-condo deal where the buyer was successful in acquiring financing.

We spoke with Botsford on the company's strategy with fractured condos and how investors should seek financing for these types of properties.

GlobeSt.com: How did “fractured” condominiums become that way?

Botsford: Historically, as has happened in recent economic cycles, there have been dramatic increases in the value of land. Because of these significant increases, building retail, office or industrial complexes for lease often becomes unprofitable since rental rates at times do not keep pace with these rising land values.

During certain cycles, developers built these types of projects for owner-users to buy their buildings or units in an effort to control their occupancy costs and possibly take advantage of appreciation. In most cases, the development plan worked well.

However, at various times, the economy would cool, and investment in equipment and facilities at these complexes was dramatically reduced. Developers were left with projects that had to be leased if not sold, creating values below their costs and oftentimes their loan amounts.

GlobeSt.com: What are the difficulties in sales transactions involving these properties?

Botsford: Providing capital for these projects can be challenging. Oftentimes, the projects are sold by, or have been managed by, lenders or special servicers. The new operator is usually not just starting over—they have to repair the effects of poor or inconsistent management.

This means that experienced sponsors need to present a dual business plan and exit strategy that encompasses the existing rental units, while marketing some of the units for sale. The financing needs to be structured in a manner that gives the lender all of their normal underwriting sizing guidelines, while also providing the operator the flexibility to execute its business plan.

GlobeSt.com: How can financing companies help with these transactions?

Botsford: To secure competitive financing for these acquisitions, potential buyers should seek to work with a finance partner who has experience in structuring the financing for these transactions. The finance professional should know the requirements of the lender and the structure needed by the sponsor.

For example, we recently helped an Irvine, CA-based investor acquire a “fractured” business park that was built in the early 1990s and was an example of a property where sales of the individual units slowed to a point that the remaining units had to be leased. At acquisition, the units were 20% sold and 80% leased to a diverse range of industrial, office, and retail tenants.

Given our experience in securing financing for complex transactions, we worked closely with the lender to demonstrate the sponsor's extensive history and experience with this type of planned-unit development. We also presented lenders with the sponsor's dual business plan and exit strategy. Because of our expertise, we were able to anticipate any reservations a lender may have and address those concerns in advance in order to secure competitive financing that met the sponsor's needs.

Further, the loan was structured in a way that provided long-term, fixed-rate protection on the leased units, while also giving release prices on units when—and if—the sponsor decides to sell them.

GlobeSt.com: What else should our readers know about “fractured” condominiums?

Botsford: Fractured condominiums present investment opportunities. These types of properties can be successful for property owners and investors if they have the experience and patience to manage and execute a prudent investment strategy.

Because of the complexity and sponsors' need for flexibility, only certain types of lenders provide acquisition financing for fractured planned-unit developments. It requires an experienced team of sponsors and capital providers to structure the transaction properly.

Instant Insights /

Important Facts About “Fractured” Condos

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