189-Unit Broken Condo Deal Sells for $14M

Runkle tells GlobeSt.com that with multifamily sales at a near-standstill in the Inland Empire and with no comparable properties having sold this year, the sale of the Siena offers information that market-watchers will want to know about pricing and cap rates in the market. "This comp says that a quality, broken condo deal that was leased up with rentals, that was not readily financable, and was widely exposed, eventually sold at at 8.93% cap on an all-cash basis," Runkle says. Although some other multifamily deals have closed in the Inland Empire in '09, he explains, this is the first property of this size and quality to trade this year in the market. The 8.93% cap rate is based on annualized actual collections from January through May and stabilized pro forma expenses.

Runkle notes that although there is talk that broken condo deals can be financed, "In the end, the only offers we were really looking at were those that were all cash and did not really need financing." The winning bid came from a pair of partnerships controlled by investor Steve Blair of Fontana-based FM Services Group; the seller was a partnership of Capmark and Capital Trust, which had foreclosed on the property in October.

The 189 Siena units that the new owner acquired include 107 one-bedroom and 82 two-bedroom units, with the remaining 107 units of the 296-unit complex having been sold to individual condo buyers before the property went into foreclosure. Runkle describes the Siena as a quality property that has been well maintained and has operated successfully as rentals, with occupancy at 93% when it went on the market, and he says that the new owner plans to continue operating it as rental property.

The 189 units that FM Services acquired include 72 that have been renovated at a cost that Runkle estimates at $20,000 per unit, and those 72 command rent premiums of $150 to $250 per month above the rates for the 117 non-renovated units. In addition, the clubhouse and other common area amenities have been renovated and upgraded.

The Siena is a 13-building complex that was sold by Archstone-Smith in December 2005 to a partnership of San Diego-based Hammer Development for $182,095 per unit as a condominium conversion project. FM Services acquired the complex as the completion of a 1033 exchange, a form of exchange that differs from a 1031 exchange in a number of respects, including a significantly longer time period for identifying an exchange property.

Runkle points out that the period in which the Siena was on the market, from October last year to the time of sale, corresponded with a time of dramatic change in the commercial real estate markets. "We knew that a new pricing paradigm had emerged, but no one knew what it was," he says. "In the end, it just gets down to cap rate and return.