Multi-Housing News - October 2009 - (Page 18)

finance/investment Investing in Apartments Today Market players describe the process of acquisitions and offer their advice for assessing worthy assets By Keat Foong, Executive Editor I nvesting in apartments is a multi-part effort that involves determining return expectations, seeking apartments, conducting due diligence and exiting the investment. The economy and financing conditions have changed, and that impacts the apartment investment process. One of the first questions is, how much return should investors seek? Mitchell Bradford, president and partner of Sycamore Urban Properties, Irvine, Calif., says that investors seem to be continuing to seek IRRs north of 20 percent per year, and cash on cash returns of anywhere from 6-10 percent. But he notes that private investors seem to be able to buy at about 50 to 100 basis points lower than institutional investors. Cap rates in the Los Angeles area seem to continue to hover around the 6.5-7.5 percent range, while properties in Phoenix, Vegas and other over-supplied markets are trading at cap rates of 9 percent and greater. After they determine their return expectations, investors can utilize a number of methods to seek apartments today. Jeffrey Friedman, president and CEO of Associated Estates Realty Corp., explains that his company has three major acquisition vehicles at its disposal when seeking apartments: brokers, potential sellers themselves and owners of portfolios. Associated Estates’ acquisitions team keeps in constant touch with owners, managers and lenders in target markets and submarkets. In this way, the company proactively keeps ahead of the competition in being informed about properties that may potentially be available for sale in the future. Associated Estates also keeps in contact with large portfolio owners regarding their divestiture plans. This makes sense as institutional investors, such as pension funds, are often culling their holdings. There is also a lot of interest on the part of investors and developers in acquiring distressed properties and or mortgages today. The methods to acquiring such assets can be similar to those for acquiring more conventional multifamily—with an emphasis, perhaps on reaching out to lenders in particular. Bradford notes that very often, distressed multifamily assets may not even be in the market. One recent deal the company has been involved in was a note sale, whereby the bank did not want to take title to the property, says Bradford. “Investors can see only what are on file with the banks,” he says. When companies find a deal that they want to bid on, some companies may conduct advance due diligence, an approach that can be taken in order to increase the certainty of closing and avoid retrading. This contrasts with the practice of throwing up a bid just to get one’s foot in the door. The importance of an investor having a reputation for certainty of closing is not to be underestimated, says Friedman. “Often, we are able to buy properties for which we are not the highest bidder because the seller understands our reputation,” he says. For Sycamore Urban Properties, conducting due diligence on distressed properties may be a more delicate matter. Unless the seller is cooperating in a short sale by the bank, the feasibility study has to be “subdued, conducted silently and secretly,” says Bradford. First, the physical inspection of the property is crucial to try and determine the completeness, quality and structural integrity of the buildings, says Bradford. Company staff may drive through a construction site, walk through a community open for sale or even just look over a construction fence. “While visiting the site, it also allows us to assess the status of the neighborhood and the potential rent ranges we will likely achieve,” he says. Other sources of income estimates come from competitive communities, input from brokers, property managers and other property owners. The expense side depends on the type of product and amenities. “We tend to use historical estimates based on product type, area, age of product, and so on,” says Bradford. In due diligence conducted for conventional apartment acquisitions that is undertaken ahead of the bid, the company will examine the information provided by the sellers, conduct a visual inspection, Often, we are able to buy properties for which we are not the highest bidder because the seller understands our reputation. “ ” and decide whether the property is in a location in which it wants to invest. After it has conducted the due diligence to its satisfaction, Associated Estates will make an offer based on its analysis, and if the offer is accepted, it will enter into a sales contract. Once the sales contract has been signed, the company will then conduct the third-party due diligence. “Until there is a contract, we will not invest in third-party reports,” says Friedman. The third-party reports are meant to ensure there are no unknowns that were not taken into consideration in the offer. “Part of the point of the due diligence is to uncover any- October 2009 | Multi-Housing News

Table of Contents for the Digital Edition of Multi-Housing News - October 2009

Multi-Housing News - October 2009
Contents
From the Editor
Executive Insight
News
Market Pulse
Finance: The Future of the GSEs
Investment: Transactions
Market Report: Midwest
Property Management
Development: Adaptive Reuse
Products
Technology

Multi-Housing News - October 2009