Toledo, Ohio – The executives running InvesTek, a local multifamily developer, have been looking for something in addition to apartments lately: bigger office space to accommodate their small but growing company, which has steadily been adding properties to its portfolio over the past six years.
They got to this pleasant task despite being in what many would consider a secondary or tertiary market, where the total metropolitan area population is only about 620,000. InvesTek’s recipe for success includes crunching numbers, walking properties, overseeing every detail, and preparation, preparation, preparation. They have slowly but surely built up a business based on acquisition and rehabilitation of underperforming Class B and Class C properties.
“We try to get it stabilized as quickly as we can, especially in a rising interest-rate environment, and as soon as we get it stabilized, we [find] conduit money,” said InvesTek partner Michael Batdorf, who structures the financing for the company’s properties.
Investors and lenders, in turn, like what InvesTek has to offer. Lenders are very willing to put their money into properties in the Midwest, said Brian Stulak, vice president at mortgage banking firm Pinnacle Financial Group, who works with InvesTek to find long-term debt financing in the conduit markets. He said that lenders like Midwestern stability, without the booms and busts of Florida and the coasts. “You don’t see a lot of peaks and valleys in terms of occupancy rates,” he said. “On the expense side, there’s a steady 2 percent or 3 percent increase each year, but outside of gas prices, you don’t see spikes in expenses.” Conduits are cashflow lenders, he said, and they like the dependable income.
The home market
InvesTek is a small real estate investment, development, management, and brokerage firm based in the Toledo suburb of Perrysburg. It is run by veterans John Aubry, Douglas Wright and Michael Batdorf. Batdorf had also worked in various capacities for his father’s residential development firm since he was 10 years old.
Batdorf’s father had retired by the time Michael graduated from college, so the young economics and finance specialist teamed up with Aubry and Wright, who had worked together for many years. All three of the partners hold the Certified Commercial Investment Member (CCIM) designation, which recognizes those who have passed a graduate-level curriculum of financial analysis classes from the CCIM Institute and have a certain level of experience.
They bring that expertise, along with the market knowledge they have as a local office of the Sperry Van Ness brokerage firm, to the task of identifying properties that could use light or moderate rehabilitation and improved management to increase their revenues.
The 45-unit River Ridge property, which was purchased in June 2001 for $800,000, is a typical InvesTek investment. Sky Bank provided a construction loan of about $1 million to pay for the rehab work. The development, located in Rossford, Ohio, was long overdue for renovation and was beset by crime. “We went in and we requested about half of the tenants to leave,” said Aubry.
Directly across the street from River Ridge is Rossford Hills Apartments, a 35-year-old, 101-unit property that was purchased in 2003. InvesTek spent more than $500,000 on improvements, such as new kitchens, bathrooms, common hallways, and entry doors. Aubry calls the reborn property “a pillar of Rossford; the community loves it and we’re very proud of it.”
The Village of Hampshire Heights is the largest property the partners have taken on to date and was their most recent deal at press time. Purchased in March 2006 for an undisclosed amount, the 304-unit, 72-building property is located on 20 acres in Toledo.
The property had been owned by Sam Zell’s Equity Residential until 1999, when it was sold to another owner. A soft real estate market, combined with other ownership problems, eventually resulted in that owner losing the property, which was taken back by the lender.
“It was mismanaged,” said Aubry. “It had gone back to the lender – ARCap Servicing – and we were able to strike a price with them.” The 1950s-vintage property has a “Harvard-like look to it,” he said, but its landscaping and exteriors were in disrepair. So it was a prime candidate for the company’s trademark attention to things such as new signage and repainted hallways. The property was almost half vacant when InvesTek purchased it, but leasing activity has been “very, very good,” according to Aubry. Management is provided by InvesTek Management Services, a division of InvesTek.
First Federal Bank supplied a $1.1 million construction loan. The construction financing “will begin amortizing after the 36-month interest-only period,” said Batdorf. “It is 25-year money, fixed for 60 months – following the 36-month interest-only period.”
InvesTek’s property acquisitions have gotten larger over time – one of Aubry’s earlier properties, which he still owns, was a 22-unit development in western Toledo he bought eight years ago that required between $3,000 and $5,000 per unit in upgrades – but the three partners don’t plan to make any radical changes that would break them out of their niche. They don’t do any condominiums, for example. “We only have so many hours in the day to do what we do and do it well,” said Batdorf.
“They have a knack for finding value within properties, whether it’s a property that is struggling or even a property that’s stabilized in its current market,” said Stulak of Pinnacle Financial. In those cases, InvesTek partners are able to see trends in the local market – such as population growth – that could change and push up rents over the next five or ten years, he added.
InvesTek typically acquires its properties for long-term holds of at least seven years, though it is flexible, such as when it spun off a 99-unit community it had acquired along with the Village of Hampshire Heights. “I look at exit strategies as: What can increase my yield on the equity more than what my equity can deliver invested in the property?” said Aubry. “Why would I sell otherwise?”
The partners focus on strategic planning from day one.
“There’s a great deal of due diligence prior to making a deal,” said Wright. “What is the upside opportunity? More important, where is the asset positioned in the market? In the case of the assets under [our] ownership right now, they’re all strategically located in their marketplace.”
InvesTek brings in one or two partners to hold minority positions when it purchases its properties, mostly Class B or Class C properties needing moderate levels of rehabilitation and – more important – good marketing and management. The company also makes investments in Class A developments. At press time, it was in the process of acquiring a 144-unit property that had been built in 2004-2005. Batdorf usually goes for bank financing with interest-only periods for construction loans, and after that he looks to the CMBS market to provide long-term debt. “We like conduit money,” he said. “We have nothing against agency money or life [insurance company] money, but we haven’t done any agency or life [financing].”
John Aubry is known, both to his partners as well as to local lenders, as a details man who regularly goes out visiting his properties, answering questions from contractors about everything from what materials to use to how to handle surprises that crop up during rehab. Wright and Batdorf also spend their fair share of time out of the office, sometimes checking out other properties to see what they can learn.
“In our travels, we go down the street and see what’s happening in other markets and what properties look like that are doing well,” said Wright. He brings his camera to take pictures of nice touches he sees at other properties, such as a nice fence around a swimming pool.
“It’s not uncommon, if one of us has seen something [good at another property], we’ll take a day and go drive there and walk a property,” said Batdorf, who added, “We get some weird looks.”
Batdorf has helped the company develop a reputation with its lenders as being easy to work with, in no small part because he is not only prepared to answer all their questions about a property but he also understands what a lender needs from him in order to make a solid loan.
Preparation pays off
“They don’t BS me and I don’t BS them,” said Craig Curtis, vice president of commercial lending at First Federal Bank, a regional bank.
Curtis has worked with InvesTek for the past three years, providing the firm with mortgage and construction financing. The company’s leaders come to him prepared when they are seeking financing, he said.
“When they bring me a package, I know it’s a pretty good package to begin with,” said Curtis, adding that their assembled documents don’t usually require him to spend much time tracking down additional information. They may include “three years of financial pictures on the apartments, two to three years of financial information [on the borrowers]; they have specific numbers from local people in the construction industry showing the improvements they’re going to be putting in,” said Curtis. “There are a lot of people who come to me about buying an apartment and they have info on the partners but not on the property.”
“They are on top of every aspect of the deal,” agreed Stulak.