LOS ANGELES—A value-add multifamily asset in Los Angeles with 100% upside just traded hands in Santa Monica. The six-unit property, purchased by Downstream Exchange Co. from a private investor, offers the buyer the prospect to increase rents by 100%, a rare opportunity in Los Angeles.
“Finding an asset with 100% upside is hard to come by in Los Angeles, but not impossible,” Kimberly Roberts Stepp, a principal at Stepp Commercial, tells GlobeSt.com. “In this case, the owner's family built the property and passed it on to its heirs who were not real estate professionals. For a sophisticated investor who understands the location in Santa Monica and the tenant profile, which lent itself to tenants willing to negotiate to relocate, this property made sense. With time, money, and actively involved management, this property will surely generate the significant rents the location and unit mix demand in the not-so-distant future.” Stepp represented the buyer and seller in the transaction, along with Aynsley Armbrust, a VP at Stepp Commercial.
Of course, for a value-add deal with this much potential for growth and in a class-A location—Santa Monica always has high barriers to entry—investors showed high interest in the property. Stepp received a strong amount of interest for the transaction and eight competitive offers, finally closing at one of the lowest cap rates in the market. “This particular property was on the market for only two weeks before obtaining multiple offers,” she adds. “The buyer was participating in 1031 exchange and understood the diamond in the rough that they were buying and paid full asking price with attractive terms.”
There is one caveat, however. The property is located in Santa Monica, which has notoriously strict rent control regulations, which means that the owner won't be able to take advantage of the upside potential until tenants move out. With the potential for so much value, however, the buyer does have options, including buying tenants out of the property. “There is a reasonable chance the tenants will relocate and it usually depends on the amount of money the buyers are willing to offer the low-rent paying tenants,” adds Stepp. “The risk is that the buyers cannot guarantee that even if they get a tenant to agree to move out for a certain sum, the tenant has a “cool off” period of 30 days to change his or her mind. The savviest of investors in Santa Monica and rent controlled areas investigate and scrutinize the tenant profiles during the due diligence period to decide whether to bet on the odds being in their favor.”
Because of the high rent control regulations, Santa Monica actually has some good value-add opportunities for investors that are willing to take on some risk, and the near guarantee that property values—and rents as leases turn—will appreciate over time. “Santa Monica is a strong market and it is an area of unlimited value-add opportunity,” Stepp says about the market. “It's not without risk, but buying in this location will inevitably hold its value and appreciate over time. Over the past decade, we've seen am enormous appreciation in values, and with the influx of new development and transit options, Santa Monica values are only going in one direction.”
Steady gains in the US economy have resulted in net positives for the multifamily sector—will this wave continue for the foreseeable future? What's driving development and capital flows? Join us at RealShare Apartments on October 19 & 20 for impactful information from the leaders in the National multifamily space. Learn more.
LOS ANGELES—A value-add multifamily asset in Los Angeles with 100% upside just traded hands in Santa Monica. The six-unit property, purchased by Downstream Exchange Co. from a private investor, offers the buyer the prospect to increase rents by 100%, a rare opportunity in Los Angeles.
“Finding an asset with 100% upside is hard to come by in Los Angeles, but not impossible,” Kimberly Roberts Stepp, a principal at Stepp Commercial, tells GlobeSt.com. “In this case, the owner's family built the property and passed it on to its heirs who were not real estate professionals. For a sophisticated investor who understands the location in Santa Monica and the tenant profile, which lent itself to tenants willing to negotiate to relocate, this property made sense. With time, money, and actively involved management, this property will surely generate the significant rents the location and unit mix demand in the not-so-distant future.” Stepp represented the buyer and seller in the transaction, along with Aynsley Armbrust, a VP at Stepp Commercial.
Of course, for a value-add deal with this much potential for growth and in a class-A location—Santa Monica always has high barriers to entry—investors showed high interest in the property. Stepp received a strong amount of interest for the transaction and eight competitive offers, finally closing at one of the lowest cap rates in the market. “This particular property was on the market for only two weeks before obtaining multiple offers,” she adds. “The buyer was participating in 1031 exchange and understood the diamond in the rough that they were buying and paid full asking price with attractive terms.”
There is one caveat, however. The property is located in Santa Monica, which has notoriously strict rent control regulations, which means that the owner won't be able to take advantage of the upside potential until tenants move out. With the potential for so much value, however, the buyer does have options, including buying tenants out of the property. “There is a reasonable chance the tenants will relocate and it usually depends on the amount of money the buyers are willing to offer the low-rent paying tenants,” adds Stepp. “The risk is that the buyers cannot guarantee that even if they get a tenant to agree to move out for a certain sum, the tenant has a “cool off” period of 30 days to change his or her mind. The savviest of investors in Santa Monica and rent controlled areas investigate and scrutinize the tenant profiles during the due diligence period to decide whether to bet on the odds being in their favor.”
Because of the high rent control regulations, Santa Monica actually has some good value-add opportunities for investors that are willing to take on some risk, and the near guarantee that property values—and rents as leases turn—will appreciate over time. “Santa Monica is a strong market and it is an area of unlimited value-add opportunity,” Stepp says about the market. “It's not without risk, but buying in this location will inevitably hold its value and appreciate over time. Over the past decade, we've seen am enormous appreciation in values, and with the influx of new development and transit options, Santa Monica values are only going in one direction.”
Steady gains in the US economy have resulted in net positives for the multifamily sector—will this wave continue for the foreseeable future? What's driving development and capital flows? Join us at RealShare Apartments on October 19 & 20 for impactful information from the leaders in the National multifamily space. Learn more.
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