First, Find the Upleg

LOS ANGELES—After searching for seven years, a private investor was finally able to find a suitable purchase to complete a 1031 exchange for his three-property, 159-unit multifamily portfolio in Koreatown. Looking for a very specific value-add opportunity, the investor needed to find the upleg to the transaction before disposing of his assets. The perfect fit: a two-property, 378-unit multifamily portfolio with significant upside in the Inland Empire. The total transaction value of the upside and the downside is $64.2 million.

"He had owned the L.A. assets for 40 years. He lives in Orange County, and so the timing was right for him to capitalize on the Los Angeles apartment market with cap rates at an all time low, and for him to exchange into a market where you can get a better yield," Cole Martens, of Lee & Associates LA North/Ventura office, tells GlobeSt.com, while his partner, Cory Stehr adds, "There was a unique condition in the market that allowed this transaction to come together. This was something that he had eyeballed for a couple of years, but all of the other conditions that he had hadn't been met until now." Martens and Stehr represented the seller in the sale and acquisition of the two portfolios and the buyer in the Koreatown acquisition.

Because the investor's portfolio was located in Koreatown, a very in-demand submarket, he was able to make the sale of his portfolio contingent on his purchase of the Inland Empire portfolio. "His Koreatown properties are very desirable assets and that is a market that is very sought-after right now by a number of investors, so that was never his concern," says Stehr. "His concern was to find a suitable upleg to avoid a taxable event for himself." Martins and Stehr took the Koreatown portfolio to a select group of buyers familiar with the market, and still received multiple offers on the assets, even with the condition that the seller could back out of the deal unilaterally. "That really speaks volumes to the demand for properties in the Koreatown Mid-Wilshire market," says Martens.

The Inland Empire properties were closer to the investor's Orange County base and had significant upside and no deferred maintenance. At closing, the buyer had a 5% to 7% upside in rents without renovating the property, according to Martins and Stehr, and renovations provided the ability to create further value. This value-add opportunity would typically have been an institutional opportunity; however, the deal included assumable agency financing, which deterred institutions from looking at the deal. "It was really a good fit for a high net worth individual investor that is not so centered on maintaining maximum leverage," says Stehr.