Bluff View, 122 Units, Hixson, TN
How We Got It
Spyglass acquired Bluff View in September of 2013. The property sits in Hixson, TN, an affluent bedroom community of Chattanooga, a market with strong employment growth, great schools, and favorable demographics. We won because we were the high bidder. We chose not to demand a price concession when interest rates blew-out by more than 50 basis points during the diligence period. We chose to maintain our unblemished reputation since we had not yet established the Spyglass brand and it was our first closing with CBRE. We later bought from the same listing agent on a hotly contested Nashville offering so our decision not to re-trade (due to the rate rise) paid big dividends down the road.
Investment Rationale
Formerly owned and operated as a small family run business (rather than being overseen by a professional property management team), Bluff View had more operating upside than any other property in our portfolio. Prior to our ownership, Bluff View had limited amenities, no model unit, no Internet presence, inadequate staffing, and minimal marketing efforts. Worse, the Seller had allowed more than half of the leases to expire without requiring a renewal. As a result, rents had fallen far below market and the property was exposed to lumpy turnover as the lease maturities were not being actively managed.
What We Did
We added amenities including a clubhouse, gym, coffee bar, playground, dog park and business center. We invested to upgrade the leasing area; we added a model unit; we installed a new pool-side stone barbeque; we invested heavily in landscaping improvements, plus new fencing, retaining walls and new signage. Under our ownership, we eliminated exposure to month-to-month tenants (56 month-to-month leases converted to 12-month leases within 6 weeks of closing). We ran a wildly successful pay-per-click campaign in 2014 before others bid up the pricing for key ad words like Chattanooga Apartments.
Results
We shopped the deal off-market for several years using four of the area’s top brokers. Some offers were compelling as far back as 2016. But we held out for the perfect 1031 bidder with an expiring window and finally hit paydirt in early 2020 creating a 2+x ROIC. It would have been 2.5+x but we had to cover more than $2 million of mortgage prepayment costs, the result of borrowing fixed-rate money and selling well before the mortgage maturity.
Early Exit Explained
Our first tenet is to protect investor capital. So, we sold for $141,000 a unit which was above replacement cost. Further, this 2000 vintage asset had $5,000+ a unit of deferred maintenance (e.g. roofs needed to be replaced immediately). The cap rate at sale, adjusting for deferred maintenance, was sub 4%, off peak NOI so it was another clear indication we had to exit since a well-timed exit is half the battle. The other half is buying right and creating value after buying. But we sold for other reasons. An adjacent 250+-unit lease-up had opened their leasing office the month after we entered the sale contract and that lease-up would force this asset to offer free rent for 12-24 months until the adjacent asset stabilized. Further, another lease-up was launching down the road in early 2022. That’d put Bluff as the last asset on Hixson Parkway heading out of town and that’s far from ideal since Bluff’s prospective rents would first pass the two new assets before reaching our asset. “End of the road” properties underperform, all-else-equal. Last, we closed post-COVID without taking a penny discount on price. The final price was $18,300,000 or $50,000 higher than the accepted bid. That was a coup since other deals were falling out of contract post-COVID. We might have been the only seller to raise the price post-COVID, but we knew the buyer’s 1031 window was expiring and felt it was fair to share in the Treasury rally post contract that goosed the buyer’s cash returns.
Tax Consequences
We partnered with the Kalikow Group out of New York to roll almost $7mm of sales proceeds into a new garden and cottage development in a Qualified Opportunity Zone in Huntsville, AL that is actually an A- site with Class A conventional deals in all directions. Huntsville was #1 for rent growth at the time we funded the new Huntsville development with a super-favorable outlook owing in part to a new $1.6bn auto plant just outside of town that will bring 4,000 direct jobs and possibly twice as many indirect jobs to this town right as the new asset enters lease-up.