At $1.71 billion, the sale of an 86- community portfolio from UDR to a partnership between Steven D. Bell & Co. and DRA Advisors was the largest multifamily deal of the year.

In any year, it would still be an impressive transaction. But given the tenor of 2008, it's even more so.

The deal, which represented 25,684 units in total, closed in a diffi cult fi nancing environment, as many lenders shied away from larger deals this year. To combat the uncertainty in the capital markets, UDR made a drastic move— the company helped to pre-arrange some of the fi nancing before it had even found a buyer.

“It was our judgment that buyers would be seeking this kind of fi nancing, that timing was critical, and we wanted to work toward certainty of execution,” says Mark Wallis, UDR's senior executive vice president.

UDR approached Red Mortgage Capital to structure and underwrite the debt, allowing Red to lock the rate when the purchaser was identifi ed. Red arranged a $1.35 billion credit facility through Fannie Mae for the deal, consisting of two $607.5 million sevenyear notes with mid- to high-4 percent interest rates, as well as a $135 million variable-rate loan. All told, the loans had a 77 percent loanto- value ratio, and a 1.30x debt-service coverage ratio.

“It certainly was a diff erent strategy for us,” says Matthew Akin, UDR's senior vice president of acquisitions and dispositions. “We typically didn't go out and get all the underwriting done. But it fi rmed our pricing because we had other parties that were knocking on the door as the debt got more attractive.”

The communities for sale represented more than a third of UDR's portfolio. The company planned for several years to reposition its portfolio by exiting some markets, like North Carolina and Ohio, and focusing instead on coastal markets and Texas.

When the North Carolina-based Steven D. Bell & Co. heard that the portfolio was on the block, it struck quickly. The geographic footprint of the UDR portfolio matched well with the fi rm's, which at that time managed about 34,000 apartment units, mostly in the Mid-Atlantic and Southeast.

Bell sensed an immense opportunity: Not only could it pick up many Class A assets in the area, it could also eliminate one of its biggest competitors from the market. In all, the portfolio had 27 properties in North Carolina, including some communities that Bell had sought to acquire from UDR in the past. The bulk of the portfolio, 25 percent of all units, was in Texas, with a large concentration also in Florida. Twelve percent of the portfolio was in Ohio, with six communities in Columbus.

When it came time to partner with an investor, Steven D. Bell & Co. had a history with DRA Advisors, having sold them about 7,000 units in 2007. The companies agreed to work together to complete the deal, with DRA investing 85 percent in the venture, and Bell investing the other 15 percent, as well as operating the properties.

The deal closed extremely quickly for such a large transaction. “I didn't even know about the transaction until mid-December, and on March 3 we were closed,” says Jon Bell, principal at Steven D. Bell & Co. After locking the Fannie Mae debt, a $200 million seller's note was included in the deal, and the remaining balance was paid in equity, split 85/15 between DRA and Bell.

The companies plan to reposition as much as half of the portfolio and already have several renovations under way. The average age of the portfolio was 24 years.

“A lot of these properties hadn't had any capital investment by virtue of being in a real estate investment trust that knew they were probably on the sale lists,” explains Bell.

Timing was crucial: The deal was forward rate-locked Jan. 23 (and closed in March), at a time when both Treasury rates and lender spreads were low and before underwriting standards grew more conservative as the year wore on. On Jan. 23, the yield on the seven-year Treasury was at 3.01 percent, and the next day, it jumped to 3.21 percent.

UDR conducted an exercise in June to see what the transaction would have looked like had it waited to put the properties on the block. “If it was [done] in June or July, if that was even feasible, it would've been $175 million less in proceeds,” says Wallis. “If you look at where interest rates had moved in June, just on that alone, it's probably at least $150 million less in price.”