THE MADISON PORTFOLIO
Investment Highlights and Thesis:
A $48 million acquisition and repositioning of Circle at Sunset and Circle at Lakeshore, two class “B” Boulder County apartment assets totaling 570 units, in partnership with Urdang Capital Management, with a combined equity investment of approximately $14 million.
The business plan provided for an upgrade to most units (average $7,000/unit in renovation cost) over an 18 month time frame to allow for meaningful enhancement in unit revenue. This was intended to reposition the rental units as the value alternative relative to the competitive set of institutional quality multifamily properties in the Longmont market.
Circle is responsible for execution of the business plan as well as the day-to-day oversight of third party property management, leasing and accounting, which is provided by Legacy Partners. Circle is directly managing both the interior and exterior capital improvements.
Ownership experienced a significant deterioration in overall portfolio occupancy during the first year of the investment due to a combination of a poor resident qualification and the introduction of large tenant concessions by previous ownership, coupled with a preponderance of lease expirations during the slow winter months. This was further compounded by the loss of units available for lease as a result of the ongoing renovation program, all of which led to an overall decline in occupancy from 90% at acquisition to approximately 68% by January 2008.
The renovation budget has been slightly higher than underwriting, costing on average just over $8,100 per unit on a run-rate basis, or a premium of just over $1,000 per unit relative to pro forma. This increase can largely be attributed to an increase in labor costs and a larger than anticipated requirement for carpet replacement throughout the project.
Since this low point in the fourth quarter of 2007 and the first quarter of 2008, ownership has experienced substantial unit demand with occupancy now standing at close to 90% on a combined basis, and has stabilized in excess of 90% at Lakeshore. Furthermore, ownership continues to see strong leasing traffic for both properties due to the high quality of completed renovations, the attentive and proactive management of the assets and the value afforded by the units themselves. Though lease rates, including concessions, remain slightly below underwritten levels this is due to the longer than anticipated stabilization period, with the partnership not experiencing push back with increased rents for both renovated and non-renovated units. The partnership intends to implement a more aggressive rental structure once a combined 90% occupancy is achieved, which we anticipate occurring prior to year-end; indeed this aggressive pricing has already been implemented at Lakeshore given physical and economic occupancy of 94% and 91%, respectively. There continues to be an average price disparity of close to $175/unit/month for non-renovated units and upwards of $75-$90/unit/month for renovated units as compared to direct market comparables. Ownership continues to realize upside in rents for renovated product with units leasing for a premium of in excess of $100/unit/month relative to non-renovated product, with little if any availability as units are completed further evidencing the ongoing success of the renovation program.
A vast majority of the demand experienced by the properties has been driven by in-migration, as the market overall remains stable at or above 94% occupancy.
Given the quality of the completed renovations, the project was one of four finalists for a Tribute Award hosted by the Colorado Apartment Association, in the category of Best Apartment Renovation Project, as judged by other apartment owners and operators.