Atherton Lines Up Buyer for 4,000-Unit Portfolio

ANI, founded in 2001, used $40 million in investor loans as capital to take equity positions in 19 portfolio companies, which together contained approximately 5,000 apartment units located in Washington State, Nevada, Arizona, Florida, and California. The company filed for protection from creditors under Ch. 11 of the US Bankruptcy Code in January, saying it had become illiquid and needed protection after some of its 200 note holders--those associated with its only secured lender, I.I.G. Financial--initiated collection efforts.

Guardian Management, led by president Tom Brenneke, is a 400-person company that invests on behalf of it and 100 high-net-worth individuals, as well as five institutional investors. It operates a portfolio of approximately 12,000 apartments units valued at approximately $900 million, of which it owns about 50%. Guardian was one of 15 potential buyout and take-over candidates interviewed by ANI's creditors committee over the past year.

Guardian is acquiring ANI's membership interest in Atherton-Newport Holdings LLC, which holds eight different sub LLCs that own seven assets in Seattle, five in Miami, two in Phoenix and one in Las Vegas. The interests, which Brenneke says range between 10% and 20%, include the rights to provide asset management and property management services to the properties on a fee basis.

ANI reportedly accumulated the assets on behalf of itself and its investors for approximately $400 million, the vast majority of it debt. Guardian is acquiring ANI's membership interest in the aforementioned assets for $1.35 million in cash, according to bankruptcy filings, plus the responsibility for managing the assets and the associated $300 million in debt on behalf of itself and the other investors.

Guardian's cash in the deal includes an immediate $50,000 emergency loan to ANI, an additional $600,000 at closing and a $700,000 participating loan to ANI that would be used to facilitate its bankruptcy reorganization. As per of the agreement, the participating loan, would not be distributed to the unsecured creditors but rather the unsecured creditors would become members of the LLC that has an interest in the participating loan. In addition, the loan would be paid back over 10 years not by Atherton but with net cash flow from the properties in which ANI will no longer have an interest.

The net cash flow from the portfolio would be allocated on a pari passu basis to Guardian and the participating loan note holders based on 1) the unpaid balance of principal and interest on the participating loan and 2) the balance of Guardian's capital contribution (including original and additional capital contributions) plus interest. After the participating loan and the buyer's capital contributions have been paid in full, 60% of net cash flow will go to Guardian and 40% to note holders of the participating loan. In the event that Guardian has not completely liquidated the portfolio within 10 years, net cash flow for distribution shall then be deemed to include the sale of those remaining assets at 97% of their fair market value (assumes 3% closing cost).

Brenneke says that Guardian's total expected invested equity has yet to be determined because some of the properties will require additional investment to restructure the underlying loans. "Some of the assets have issues, a little hair; they are not meeting covenants now or may not be in the near future," he says. "We are talking to lenders and negotiating extended maturities and rates."

The creditors committee that selected Guardian as the would-be buyer is chaired by Steve Trax, principal of MTX Wealth Management LLC of Bethesda, MD, and consisted primarily of ANI's note holders who had advanced, in the aggregate, more than $30 million to ANI. "Guardian was selected because of its experience and expertise in handling complex troubled assets," said Trax. "They were creative in working with the Committee to develop a structure that meets the needs of the initial capital investor base."

The plan is for Guardian to acquire the ANI portfolio through Guardian's first strategic investment fund. Earlier this year Guardian used the fund to acquire the franchise rights for the Sperry Van Ness brand in Southern California, Arizona and Oregon as well as eight previously corporate-run SVN offices. That deal closed in September. The ANI deal is expected to close in stages in the first quarter of 2009.

In addition to the ANI deal expanding its portfolio by 33%, Tom Brenneke says an additional benefit is that it will further the company's reputation for being able to handle complex real estate transactions at a time when such skills are in high demand. "This comes at a time when the world is watching to see whose out there making any motions in terms of buying," he says. "[The ANI deal] is what the investment side is going to look like for the next year or two; there will be no down-the-fairway acquisitions of 250-unit walk-ups with the GE Capital's of the world."

Avalon Holdings, a Portland, OR-based real estate investment company controlled by Brenneke's brother Paul, initiated and structured the transaction for Guardian, acting essentially as an investment bank. Brenneke also gives credit to Robert Opera, attorney for the creditors committee, whom he says was instrumental in evaluating note holders' options, negotiating agreements with ANI's secured creditor and with Guardian, and getting the agreements executed. Opera is a partner at Winthrop Couchot Professional Corp., a bankruptcy law specialist in Newport Beach, CA.

ANI's January bankruptcy filing came approximately a year after Atherton-Newport co-founder Ashish K. Khatana, in an interview with GlobeSt.com, said that the firm planned to invest in and develop $600 million of property during 2007, with plans to take its operations global in 2008. Khatana told GlobeSt.com that the company was funded through a combination of its own capital, high-net-worth individuals and institutional investors, and that it had invested $425 million in 2006 after $190 million of investment in 2005.

Khatana added that ANI's business plan aims at generating value through capital improvements that in turn support rent increases, and that the company's typical hold period is about four years. According to the company's website, Atherton-Newport had acquired 41 multifamily properties and sold 26 of the 41 properties as of July 31, 2007, resulting in 50% gross and 37.2% net annualized returns to investors. The company was founded by Khatana and Roger E. Fiola, who are listed as co-managing members of the firm on the bankruptcy filing. ANI's bankruptcy attorney did not immediately return a phone call seeking comment about the pending transaction.

The names of the assets that Guardian is acquiring and interest in and, as a result, responsibility for, are as follows: Providence Landing, St. Croix, Bradford Park, Bordeaux, Copperstone, Summerwalk and Bravado in the Seattle area; Lakeshore Landing, Park Plaza, Watermarke and Cottage Cove I & II in Miami; Morgan Park and Autumn Ridge in Phoenix; and Parc West in Las Vegas. The LLC that owns the Las Vegas property is involved in its own bankruptcy proceedings but is expected to ultimately be included in the deal.