IT FINALLY LOOKS like The Palms of Monterrey is going to make it after all. Originally envisioned as apartments, the 408-unit Class A property in Fort Myers, Fla., was purchased in 2006 by locally based condo converter BTS Monterrey Holdings for about $195,000 a door—a purchase price funded in large part by a senior secured mortgage with Corus Bank. Neither entity survived the transaction, however—BTS' condo sales were unsuccessful, and the distressed loan played a part in the failure of Corus, which was taken over by the FDIC last September.

All the while, Ft. Myersbased real estate turnaround specialists Christian Tyler Properties targeted the loan as a possible distressed asset investment opportunity, entering into negotiations in September 2009 with Corus to acquire the note, just before the bank's takeover. The negotiations resumed as the FDIC sought to unload prime Corus assets. By the end of October, Christian Tyler had pulled together a purchasing partnership comprised of itself; Tampa, Fla.-based DeBartolo Development (the two firms holding a collective 10 percent stake); and Dallas-based Behringer Harvard, which became the majority JV partner with a 90 percent stake.

That JV bought the senior note in October 2009 in a deal reportedly worth $25.4 million, or roughly $62,000 per unit— just 36.8 percent of the original $69.9 million loan. In May, The Palms' destiny as an apartment property finally came full circle when Behringer Harvard announced that the JV had completed a foreclosure on the property's mortgage debt.

“In the current environment, it's possible for REITs and similar institutional investors to identify unique opportunities to purchase first-lien mortgages, often at significant discounts,” says Behringer Harvard chief administrative officer Jason Mattox. “These debt investments have the potential to provide a healthy current yield and opportunitylevel total returns.”

The ownership group has already seen improvements. Occupied at 92 percent when the note was assumed last October, The Palms—which boasts a clubhouse, fitness center, business center, indoor racquetball court, tennis court, and poolside WiFi—is now 98 percent leased. “Our strategy is to focus on recapitalizing distressed sellers, not distressed assets,” Mattox says. From an on-site perspective, the ownership group says strong property management during a turnaround is vital. “We retained [Fort Myersbased Property Counselors Management Group], which has done a good job communicating with residents this past year,” Mattox says. “Their efforts established a strong sense of continuity and stability.”