Mid-America Apartment Communities is gearing up to take advantage of a wave of distressed assets coming online.

The Memphis, Tenn.-based REIT recently established a $250 million acquisition fund, a joint venture with an affiliate of Thackeray Partners, which it expects to deploy over the next 18 months. The fund will target value-added deals on properties in the Sun Belt region, with expected returns of about 14 percent.

But the company’s large balance sheet has also afforded it the ability to play offense during the downturn. While Fannie Mae and Freddie Mac are providing critical liquidity to the industry, they are less of an option for distressed deals as they shy away from financing transitional properties, or even stabilized properties in troubled markets.

“We think there are going to be great opportunities, particularly in troubled markets,” says Simon Wadsworth, Mid-America’s CFO. “We are in a position to play offense both in our balance sheet and secondly with this joint venture we have put in place.”

In late June, the company acquired the 232-unit Skyview Ranch in Gilbert, Ariz., for about $75,000 per unit—a deep discount from the $110,000 per unit that Mid-America sees as the true worth of the property. The complex, located near Phoenix, was only 76 percent occupied and came online in 2007.

Mid-America was able to bid before the asset hit the market. The seller, Fairfield Residential, approached Mid-America about the property, saying it would agree to the low price if the deal could close by the end of the second quarter.

“It was a situation where the lender was wanting to get his money back, and the owner was tired of feeding the property,” Wadsworth says. “The seller came to us knowing there wouldn’t be a financing contingency, knowing we can move fast.”

The company also flexed its balance sheet last September when it purchased Village Oaks, a fractured condo deal in Tampa for about $98,000 a unit. Nineteen of the deal’s 235 units had already been sold, but 17 of those have since gone back to the lender or were on the verge of default, so Mid-America is in the process of buying the rest of the units back. 

“Those two deals are examples of the types of deals that we think are going to be coming,” Wadsworth says. “There’s going to be much less competition when others are fearful or just unable because they can’t get the financing.”

Mid-America will own a one-third interest in the joint venture, called Mid-America Multifamily Fund II. But there’s also a fee structure associated with the fund: The company will earn a 4.25 percent property management fee, an 0.5 percent asset management fee, and a 0.5 percent acquisition fee.

How does the REIT decide what to acquire for its portfolio as opposed to the new acquisition fund? The joint venture targets properties that are seven years or older, while Mid-America is more focused on adding newer properties to its own portfolio, which is one bright-line distinction. Newer properties in markets where Mid-America has high concentrations will also be offered to the fund.

This is the second acquisition Mid-America has launched in the past two years. An earlier joint venture with Fannie Mae was discontinued in August 2008, just before the government-sponsored enterprise was taken over by the government.