Earlier this week, San Diego-based Fairfield Residential, the nation’s 13th largest apartment owner, according to Multifamily Executive's 2009 list of Top 50 Owners, announced that it was filing for Chapter 11 bankruptcy protection. Now that the dust has settled, experts say the filing was long expected, and despite the news, the industry can expect an orderly bankruptcy process without a firesale of assets. 

Fairfield had been renegotiating with its lenders for more than a year, but eventually it collapsed under the weight of purchases from 2004 to 2007. Many of those deals were now upside down, leaving the company in violation of covenants with Wells Fargo (which made the loans through Wachovia Corp.) and Capmark Corp., according to the Wall Street Journal.

Representatives from Berkadia, which recently purchased Capmark Financial Group's loan origination and servicing business, say they have no exposure to Fairfield. While Berkadia Commercial Mortgage bought Fannie Mae, Freddie Mac, and HUD loans from Capmark, the construction loans, some Low-Income Housing Tax Credits, and a handful of equity investments from Fairfield weren’t transferred. Wells Fargo declined to comment for this story.

“Although the relatively strong demand for multifamily rental units during this recession has allowed our businesses to continue to perform well, the unprecedented collapse of the U.S. real estate and capital markets has made it difficult, if not impossible, for Fairfield to continue without restructuring its financial obligations,” said Christopher Hashioka, chief executive officer and president of Fairfield, which owned nearly 55,000 units in 2008, according to the National Multi Housing Council, in a press release. “Through our productive discussions over the past year, we have reached agreements with our lender groups that will allow us to continue to provide property management services, complete our construction projects and preserve value for our creditors, and we thank our lenders for their support.”

What Went Wrong
Like many troubled owners, it was bad buys that did Fairfield in. Real Capital Analytics reported that since 2001, the firm made acquisitions of $6.1 billion and dispositions of $8.8 billion. The problem was the markets. Fairfield was most exposed in the decimated Phoenix market (which has also caused problems for operators such as The Bascom Group and Bethany Holdings Group) with 52 properties. That was followed by Los Angeles and Seattle with 30 properties, Atlanta with 29 properties, and Denver with 20 assets.

“Fairfield acquired a significant amount of assets at the height at valuations that no longer made sense,” says Dan Fasulo, managing director for New York-based Real Capital Analytics. “They were heavy into the condo conversion game. In the middle of the decade they were complexes at valuations that only make sense if you can sell off the individual units.”

The firm also made a number of purchases between 2004 to 2007—when cap rates were at their lowest. “From 2003 to 2008, our preliminary results indicate that about 70 percent of any gains in volumes came from cap rate compression and not from an increase in income,” Calnog says. “If they bought a lot of properties from 2004 through 2007 when three quarters of their value increase came from cap rate compression, now that’s gone.”

As those values evaporated, Fairfield’s properties were worth less than their loans. “They found themselves upside down,” says Doug Bibby, president of the Washington, D.C.-based National Multi Housing Council. “It’s a problem plaguing the whole sector. Asset values have fallen so far they’re underwater in terms of what the property is worth versus what they owe on the mortgage.”

As of September, Fairfield listed assets of $958 million and liabilities of $834.9 million. The Journal reported that "Fairfield will need more creditor support to get its reorganization plan approved by a bankruptcy judge."

“I don’t know how the bankruptcy courts would lean this time around,” says Victor Calanog, director of research for New York-based Reis. “It’s hard where courts will decide what to do with bankruptcy proceedings.” 

In addition, the Journal reported that the California State Teacher's Retirement System (CALSTRS) and a subsidiary of Mitsubishi Corp. were large investors in Fairfield, which told the Journal that, while CALSTRS' investments could be wiped out by the bankruptcy, it would continue its joint venture partnerships with the firm.

Plans to Re-emerge
Fairfield reacted proactively to the filing, putting out a press release, list of frequently asked questions, glossary of terms, and link to the latest court filings on its Web site. On the site, that company announced that it has every intention of emerging from “creating a stronger go-forward operating platform and continuing to be an active player in the multifamily sector.”

“As part of the filing, Fairfield and its significant lender groups have agreed to the framework of a consensual Plan of Reorganization that will enable continuity of Fairfield's property management, asset management, construction services and general partner functions for the benefit of its creditors and other stakeholders,” the company said on its Web site. “The plan maintains Fairfield's existing infrastructure in a new operating company, which will include key personnel, and which will allow the Company to facilitate debt and equity solutions, provide additional stability to its joint ventures and manage its properties."

Fairfield’s plan does include the creation of a separate operating trust to liquidate certain assets. It believes that its restructuring plan will allow it to emerge from bankruptcy and eventually create a stronger company that will be active in the multifamily sector. “Certain Fairfield assets not assigned to the new operating company will be assigned to a liquidating trust that will serve to maximize creditor recoveries,” the company said on its Web site. “Under the plan, the new operating company may obtain new capital, and Fairfield has secured interest from a number of parties to provide this financing.”  

Before filing, Fairfield had been an active seller, including two recent properties that went to Addison, Texas-based Behringer Harvard, which took control of the assets by essentially taking a larger equity stake in the deals.

The Industry Buzz
The industry scuttlebutt is that there won’t be a big court-ordered firesale, but instead an orderly transition of what could be the entire portfolio. Both Fasulo and Calanog are looking to the General Growth Properties bankruptcy as a template for Fairfield.

“I think it will probably be a mini-General Growth where debt holders believe there is more value in keeping all of the pieces together than stripping everything out and pure liquidation,” Fasulo says. “We’re talking about hundreds and hundreds of apartment communities. If they hit the market with that in one fell swoop, it will depress the market.”

Calanog agrees. “The opportunity here is there may be really good assets in that portfolio that they may be compelled to sell,” he explains. “If its 100 percent leased, and it’s in a nice environment and rents have cratered all that much, then that might be a clear opportunity that others may able to take advantage of, almost like Simon Properties with General Growth.”

Jerry Ascierto and Chris Wood also contributed to this story

Fairfield Residential's Holdings, By Property Type 

No. of properties Total Volume (in millions)
Garden 379 $11,634




Development Site 10 $138
Strip 3 $82
Warehouse 3 $38
Full-Service 2 $133
Limited Service 1 $20
Other 2 $68
Total  458  $15,202

 Source: Real Capital Analytics

Fairfield Residential's Holdings, By Market

No. of Properties Total Volume (in millions)
Phoenix 52 $1,257
Los Angeles 30 $1,086
Seattle 30 $642
Atlanta 29 $951
Denver 27 $694
Washington, D.C. (metro) 21 $811
Dallas 19 $505
Other 250 $9,257
Total 458 $15,203

 Source: Real Capital Analytics

Claims Against Fairfield Residential

Creditor Amount of Claim (in millions)
Wells Fargo Bank $129.8
Bank of America $84.0
Capmark Finance $79.5
Compass Bank $64.2
Regions Bank $52.3
Principal Financial $46.7
Freddie Mac $45.9
Royal Bank of Canada $45.0
Cigna $40.8
Fifth Third $40.7
Pacific National Bank $38.4
Nationwide Life Insurance $37.4
Landesbank Hessen-Thuringen Girozentrale (Helaba) $35.8
US Bank $34.3
JP Morgan Chase Bank $28.7
Massachusetts Mutual Life Insurance Company $27.6
Fannie Mae $26.4
Northwestern Mutual Life Insurance Company $24.5
PNC Bank $23.7
Sovereign Bancorp $23.3

Source: State of Delaware Bankruptcy Court