Overview of the opportunity
This property was brought to us off-market because of our reputation of closing on deals and our extensive relationship with the brokers involved. This was a complex acquisition involving multiple out-of-state family trusts who where selling the asset because of a partnership dispute and inadequate capital to complete the necessary capital improvements. This asset provided a unique opportunity because we were able to acquire the property significantly below replacement cost which is located in a high demand submarket in San Diego with adequate employment, close proximity to the city center, convenient transit and abundance of neighborhood shopping in addition to a newly located trolley line less than 1/8th of a mile from the subject property. The property consists of highly sough after 24 large 1100-1200 square foot townhouse on a 1.5 acre lot spanning 6 buildings with 4 town homes each accounting for approx. 28,500 rentable square feet. This property is has enjoyed historically high levels of occupancy because of its unique unit mix of 2 bedroom/ 2 bathroom and 3 bedroom/2 bathroom floorplans in a park like setting. After first seeing this asset we saw a tremendous opportunity to acquire a rarely traded asset that has intrinsic characteristics that makes it more desirable than surrounding product. This property was a classic example of property level distress due to the inefficient ownership structure and lack of operational efficiency since it cycled through 3 management companies before coming to market. Out-of-town ownership neglected this asset over 15 years of ownership which reselected in under-rented units, significant deferred maintenance and an excessively high operating expense of 55%. We saw an opportunity to leverage our extensive management infrastructure to take control o this property and focus on operational and financial controls while implementing a property wide renovation which would reposition this asset from a C class property to a B class asset. IN addition to intrinsic characteristics market conditions of sub 4% vacancy and raising rents also mate this an enticing investment while mitigating our downside with in-place below market cash flow.
Our property level strategy for this asset involved controlling variable expenses, a two phase renovation, revenue optimization, rebranding and repositioning this asset from a class C to a amenities class B asset. Upon acquisition our team of experienced property managers focused their attention to minimizing operating expenses to a normalized 35% while we drafted a contemporary renovation plan. During the first half of 2016 this asset will benefit from an extensive exterior upgrade including stucco, lighting, drought resistant landscaping, asphalt refinishing, signage, decking upgrades and a complete interior upgrade with a clean and contemporary look and feel. We will also focus on creating tenant amenities as common area to congregate, a renovated laundry room, and built in bbq area. Upon executing our renovation plan we see a clear path to substantially increase gross revenues through a combination of re-leasing units at market rates and further capturing upside by monetizing on additional storage space and vending machines which will be installed. Our goal is to create a desirable property which sets itself apart from the competition in terms of quality and amenities but still competes relatively close on price in order to maintain optimal occupancy and a sticky tenant base. A big focus will also be to re-brand this asset in the community as it has been in dis-repair for over a decade which will be achieved through a local marketing campaign and support from community leaders. Ultimately we project average cash-on-cash of 8.5+% on a turnkey asset with minimal capital improvement required in the future. It is important to note that rent increases will be gradual over the next 24 months so we have sufficient cash-flow in place to service our debt and cover operating expenses which mitigates our downside risk and exposure to capital markets.