Meridian at Hermitage, 261 Units, Hermitage, TN
How We Got It Spyglass acquired the property in May of 2014. Meridian at Hermitage is located in Hermitage, Tennessee, a bedroom community of Nashville less than 5 miles from the airport and 12 miles from downtown. Competition for the asset was limited because the asset showed poorly.
Investment Rationale When we closed, rents were $175 lower than comparable vintage properties just up the road. After touring more than 10,000 properties throughout the southeast, we knew less than $50 of that gap was explained by the less-than-ideal neighbors on either side of this asset. Most of the rent gap was explained by a weak management team who spent nothing on internet advertising for a property with zero road frontage. The rest was explained by deferred maintenance that underscored the owner’s neglect on all fronts. It was also a great time to enter Nashville, with the explosion of high-wage job growth and lagging new construction pipeline.
What We Did We overhauled the marketing program, replaced rotted T111 breezeway siding, replaced all balconies, replaced 50+ year old single pane windows, revamped the curb appeal and refreshed all amenity spaces. In total, we completed more than 50 discrete projects including new mailboxes, new front door kick-plates, new railings and new walking paths.
Results We knew we’d flip the asset because it had features that made it a poor long-term hold. So we financed with floating rate debt that could be easily prepaid. We held this asset for just over 2 years, generating a 33.6% net IRR and a 1.88x multiple on invested capital (after exit costs and after the sponsor promote)..
Early Exit Explained The asset has unfixable flaws. It has horrible layouts, few in-unit washer-dryer connections, poor curb appeal owing to the ceiling-mounted HVACs, failing wastewater and water supply lines, galley kitchens, elevated neighboring crime, and a bad school system. These flaws were acceptable at our entry basis but not at our exit price. Not selling at a fat exit price is like buying at that same price so while we loved this asset at $52,000 a unit, we had zero interest holding it at our $86,000 per unit exit price. We also saw the new supply pipeline explode and wanted to get out before peers started offering upfront concessions to stay full.
Tax Consequences 100% of the LP’s rolled their sales proceeds into a gorgeous complex in the fastest growing submarket of Augusta, GA via a 1031 reverse tax-deferred exchange. Because of the scale of the Augusta asset, more than $9 million of new investor capital was raised. That money was invested side-by-side via a Tenant-in-Common structure, along with the sales proceeds from The Meridian at Hermitage, making the Augusta closing the largest syndicated closing Spyglass had completed at that time, with investor capital just shy of $17 million. The window to exit substandard 1970’s vintage assets in a marginal location is not wide. We jumped through the window while it was open. With 20/20 hindsight, it was a great swap. We’ve got a beautiful newer community of scale (358 units) in the #1 county in the fast-growing Augusta MSA that continues to benefit from heavy cybersecurity investments including a new Cyber Command Center (one of three in the nation).