In 2006, Los Angeles–based Resmark Equity Partners, a money manager for the massive California pension funds CalSTRS and CalPERS, invested in a 180-unit deal with Newport Beach, Calif.–based for-sale builder John Laing Urban, which was owned by Dubai-based Emaar Properties at the time. Then, in early 2009, the privately held Laing stopped construction on the project, known at the time as the Madrone. Less than two months later, the builder filed for bankruptcy, leaving Resmark with a decision to make.
“We had a half-built building with a very substantial investment,” says Robert N. Goodman, president of Resmark Apartment Living, a division of Resmark Equity, also in Los Angeles. “We had no builder to [finish] it, and we were in the worst financial crisis since the Great Depression.”
Unlike a lot of equity investors burned by the recession, Goodman stuck it out. Looking at the local market, however, he decided that Hollywood couldn't absorb 180 condos. But he thought there might be another option.
“We concluded that if we could acquire the construction loan from the lender at a good enough discount, we could make this project work,” Goodman says.
Resmark bought the asset at a trustee sale in August 2009. The project, now called The Avenue, had a soft opening in December 2011, and the company says it is “extremely pleased” with the leasing activity.
As Resmark's experience shows, reversions can be successful. But you need to be able to overcome some hassles and surprises to cross the finish line successfully.
Holdout Tactics
Since 2009, Ann Arbor, Mich.–based McKinley, an apartment firm that owns 11,569 units and manages 33,959, has bought 18 condo properties totaling approximately 3,000 units in Florida. The company has established one major rule—don't buy anything in which you don't control at least 80 percent of the units.
“With 80 percent, you control the condo,” McKinley CEO Albert Berriz says. “At 90 percent, you can dissolve it. In all cases, we've quickly gotten to 90 percent.”
Whether you own 80 percent or 90 percent, Berriz says it's important to know who's in the group of remaining owners. Things can turn ugly if an apartment owner tries to kick out the existing condo owners, for example. “We look at the remaining 20 percent [through tax rolls] to make sure we don't have the owner-occupied risk,” he says. “[That way] you don't have the factor of people [who live there] wanting to stay.”
Often, investors, and even some owners who live in a building, are looking for a way out, says Jack McCabe, CEO of McCabe Research & Consulting in Deerfield Beach, Fla. But a reverter can make a compelling case to both the owner and the investor with a solid offer.
“[The condo reverter] is saying, ”˜We'll give you this price now,'_” he says. “_”˜If you don't take it now, homeownership dues will skyrocket. Property values will go down because you're in a property that's primarily rental now. On top of that, some buyers won't be able to get an FHA loan because there are too many renters in the property.'_”
Hidden Defects
Resmark provided equity for the Madrone, but when it took over the property, the company found some surprises—the windows had been flashed improperly, for one. The building had already been stuccoed, so the company was forced to strip off all the stucco, remove every window, and reflash each one.
“While it was a costly decision, it was an easy one,” Goodman says. “We could fix the windows or live with a building that leaks. We were hell-bent on delivering a quality product.”
McKinley welcomes such challenging situations because they provide the firm with a real opportunity to add value with a reversion. Berriz cites the 120-unit Palma Ceia in downtown Tampa, Fla., which he calls an example of a building with “extreme physical distress.” Its roofs were caving in, it suffered water infiltration and busted windows, and acid and concrete had been poured into the toilets by contractors who hadn't been paid. Needless to say, the city shut the project down. But McKinley put in $20,000 a door to rehab the deal.
“For us, the deferred maintenance wasn't an issue,” Berriz says. “We're actually seeking properties with deferred maintenance. Fifty percent of all buildings [we've bought] have had serious physical distress. In some cases, we've been able to get significant price cuts because of that.”
Game On
Even though there are pitfalls involving construction or the amount of control a converter can get in a deal, Berriz says the most common problem he sees in reversions is the lack of a clear game plan.
“People don't road-map a clear path from when they're buying to the endgame,” Berriz says. “The endgame doesn't have to be all of the units. If you do your due diligence, you can make a clear determination of what you can do and whom you can buy it from.”
But even with a map to get control of a condo building, outside forces can sometimes intervene. Berriz's model had been buying condos from servicers. When foreclosures were put on hold because of the robo-signing controversy, however, his pipeline dried up. Even as things have opened up again, the process in Florida isn't very efficient. “The courts are so backlogged,” Berriz says. “Executing any kind of short sale takes forever.”
Even with that slowdown, Berriz acknowledges that the inventory of good product in the Sunshine State is starting to decrease, estimating that there are only about 5,000 bank-owned units left. But if you look hard enough, you can find reversion opportunities with existing properties and even new development. “You have to get in there and find these deals,” Berriz says.
