Paddock Club, 200 Units, Florence, KY
How We Got It
Spyglass acquired Hawk Ridge in June of 2011 immediately after the property fell out of a prolonged escrow. We worked fast to pre-empt before the property was broadly remarketed. We agreed to post a $250,000 non-refundable deposit which was unheard of at that time. Further, we agreed to the Seller’s bare bones purchase contract, a necessity since the asset was the last asset within an old CMBS trust and was being serviced by a special servicer who was unable to make any meaningful reps or warranties. In so doing, we believe we acquired the asset below fair value.
Investment Rationale
Getting Hawk Ridge at a fair price was only part of what made it attractive to us. We also liked Hawk’s best-in-market schools, a unit mix that was well-suited for families, great site layout, prime setting on a heavily trafficked road in the affluent Winston-Salem suburb of Clemmons, and proximity to area employers. And as important, Hawk Ridge offered a superb value-add opportunity because the prior owner let the property fall into disrepair, creating upside to push rents and occupancy following some basic cosmetic fixups.
What We Did
Between 2011 and 2014, we deployed substantial capital to enhance the property’s curb appeal by refurbishing the clubhouse, repairing the exterior, replacing signage, painting the exterior, and adding a new playground and picnic pavilion. In addition, we upgraded about 20% of the units’ interiors with new hardware and light fixtures, flooring, and black appliances, which resulted in attractive rent premiums and strong incremental returns on capital allocated to such value-adds. And in the process, we completely repositioned the tenant base, pushing rents, improving occupancy, and reducing bad debts and delinquencies.
Results
The value-add program was a huge success. We grew Hawk’s annualized Net Operating Income from under $400,000 in Q2 2011 to more than $750,000 by Q3 2014. In June of 2013, about 2 years after closing, we completed a partial cash-out refinancing that returned more than 55% of our original investment. In October of 2014, Spyglass sold the property. Hawk Ridge produced 1.94x return on capital and just shy of a 25% internal rate of return to investors. We would have preferred to hold it longer but wanted to show a “round-trip” double up to our initial backers. It is the last time we sold for non-economic reasons.
Tax Consequences
We had not yet formulated a way to roll a 20+ high net worth investor syndicate using a 1031 exchange. So we simply returned the sales proceeds cash causing investors to take large capital gains.