Tarragon Corp.'s sale of about 8,000 units across dozens of properties, including this one in Savannah, Ga., helped give the firm a healthy dose of capital liquidity.
Lanny Nagler Photography Tarragon Corp.'s sale of about 8,000 units across dozens of properties, including this one in Savannah, Ga., helped give the firm a healthy dose of capital liquidity.

Going into the summer of 2007, Tarragon Corp. CEO William S. Friedman says he had a plan for the New York City-based firm. Friedman wanted to split the company into two parts. One would be a real estate investment firm that would hold multifamily and commercial properties, while the other would focus on development. Then, the credit markets crashed. “The increasing need for liquidity and the continued decline in the home sale market frustrated our plan,” Friedman says. “We had to go to a plan B.”

Plan B entailed radically reforming the balance sheet, which concentrated on the development business, and finding a partner to grow the investment portfolio. The company followed that template, but, in the process, became much smaller. Tarragon was lucky to come into a much needed jolt of capital, but the firm's experience is a template other cash-strapped for-sale builders could follow in the future.

BAD POSITION Tarragon did not learn its lesson after its first foray into the multifamily sector. The firm's operations are rooted in the apartment business, but the 25-year-old company dabbled in condo conversions with success in the 1970s and 1980s. Then, about 10 years ago, it became active in condos again, investing in land and buildings throughout Florida. For a while, things went great, but then the market turned in 2005 and 2006, leaving the company trapped under a lot of conversions.

“In Florida, they were overextended because they bought all of these rental apartments to convert to condos,” says Cushman & Wakefield's vice chairman Andrew Merin, who orchestrated Tarragon deals in Florida and New Jersey.

Tarragon also got stuck in bad debt situations. It underwrote many deals at condo cap rates and was then forced to operate them as rentals.

“Once the debt markets turned, they needed a considerable amount of refinancing that they couldn't do,” says Haendel E. St. Juste, an analyst with Green Street, a Newport Beach, Calif.-based REIT research and consulting firm.

Friedman started hawking off his conversions in 2006, using three criteria to determine which properties he would sell. First, he disposed of properties Tarragon couldn't afford to own—the ones that had lots of locked-up equity. Second, he sold assets that required significant investment or a long holding period before they could generate cash. Finally, he got rid of properties that no longer fit in the Tarragon portfolio—those properties acquired for conversion and now stalled. So, the company leased them up and sold them.

Since 2006, Tarragon has sold 6,771 units for more than $700 million. The sell-off was only part of the reclamation effort, though. Tarragon also needed help from its lenders. In March, the company announced that it had reached agreements with the holders of $125 million of corporate-level unsecured subordinated notes. The agreement, effective through Sept. 30, gives the company 270 days to decide whether to purchase its notes at a discount. Its covenants are waived until this deadline occurs. “It gives us a choice of taking 18 months to recast our balance sheet and meet the covenants in that loan agreement or pay them off at a discount,” Friedman says. “Even though paying it off at a discount is very attractive in terms of repaying our capital, you have to recognize that that kind of debt is an attractive thing to have on your balance sheet. The debt has never been accelerated.”