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Tuesday, September 7, 2010 |
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| Foreclosure knocks at apartment firm's door |
By Josh Brodesky |
ARIZONA DAILY STAR |
July 31, 2009
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The owner of numerous large apartment complexes in the Tucson area is facing foreclosure on five of its properties here after defaulting on more than $53 million in loans.
The challenges facing The Bascom Group, a private equity firm based in Orange County, Calif., are numerous, ranging from high vacancy rates and declining rents to aggressive leveraging. Many of the multimillion-dollar loans the firm received during the peak market years of 2006 and 2007 came with minimal money down. For example, it received $12.6 million from General Electric Capital Corp. to buy Sienna Ridge Apartments while only placing $390,000 down.
General Electric Capital Corp. is the lender for all five apartment complexes, and the notes are cross-collateralized, meaning a default on one loan places all of the other ones in jeopardy.
"They paid too much money for them," said Humberto S. Lopez, president of Tucson-based HSL Properties, which owns 28 apartment complexes and is in negotiations to buy three more in Phoenix. "Highly over-leveraged. I don't know what they were counting on."
Voice and e-mail messages left with The Bascom Group Friday were not returned. But in the fall of 2006, when Bascom was buying 11 apartment complexes in the Tucson area, the firm's management was banking on rising rental rates and a growing demand for rental housing.
"Two years ago, people could buy a house for less than they could rent an apartment. Well, those days are gone," Jerry Finney, who was then a partner in Bascom, told the Star in October 2006. "All the planets are aligning to apartment operators right now. And you've got job growth." Sharp decline
Back in 2006 the apartment vacancy rate for the Tucson metro area was 4.5 percent, numbers from commercial brokerage CB Richard Ellis show. Rental rates were on the rise then, too, jumping from about $597 in 2005 to about $634 in 2006.
Fast-forward to the summer of 2009 and the picture is much different for apartment complexes of at least 40 units. Vacancies for the second quarter hit 12.6 percent, numbers from apartment tracking firm Real Data show. Rents have gradually declined back to 2006 levels.
That's "the highest vacancy rate that has been reported by Real Data since they started doing this since the end of 1992," said Mike Chapman, a CB Richard Ellis broker who specializes in multifamily housing.
Chapman said he expects to see improvement during the third quarter as students lease space for school. But he said the challenges facing apartment buildings began in 2007 as the state introduced employer-sanctions laws targeting illegal immigrants and construction began to slow. Then unemployment hit — it was 8.2 percent in Tucson in June, numbers from the State Department of Commerce show — and vacancies began to surge. As unemployment steadies, vacancies will too, Chapman said.
But those investors who bought during the peak and with little equity — like Bascom — are probably facing looming foreclosure, particularly as commercial property values fall. Bascom already has already had one apartment complex go back to its lender: the Tierra Bonita Apartments, 175 W. Valencia Road, which it bought for $16 million with $250,000 down in April 2006.
The lender was Massachusetts Mutual Life Insurance Company. The complex sold in June for $5.7 million to CB-Apts LLC, whose sole corporate member is Massachusetts Mutual Life Insurance.
"Most of the defaults were properties that were bought near the peak and were highly leveraged," said Bob Kaplan, a principal with Picor Commercial Real Estate Services specializing in multifamily housing.
Kaplan said he knows of 10 large apartment complexes in default — including two in the foothills and one student complex on Stone Avenue near downtown — and he expects more defaults to come.
"There will be other ones as the situation continues," he said. "We're not going to bounce out of this real fast."
Moody's Investors Service recently reported that nationally, commercial values dropped 7.6 percent in May following an 8.6 percent drop in April. Values are down nearly 35 percent from the peak market in October 2007. South side suffering
How severely the downturn is affecting apartment complexes really depends on the class of the building and the submarket. Higher-end properties tend to be doing better, and the C-level housing, like the apartment complexes Bascom purchased, is struggling.
The north side and student markets have stayed relatively strong, but the south side, where there is a glut of lower-end complexes, has a vacancy rate of about 17.2 percent, numbers from CB Richard Ellis show.
"Most of the problems are really on the south side," said Lopez, of HSL properties.
And in a competitive market where prospective tenants have many choices, strong management is probably the biggest difference between a high and low number of vacancies.
"All management companies and all apartment communities are competing for a smaller supply of renters, so you have to provide better service, and you have to provide a sense of community for residents," said Melanie Morrison, a principal with MEB Management Services, which manages more than 23,000 apartments, including many of the Bascom apartments in foreclosure. "You have to provide the best apartment for the best price, and that's really what people are looking for right now."
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