The Edge At Olathe, 352 Units, Olathe, KS
How We Got It
We acquired The Edge at Olathe in Olathe, KS in December of 2013 from a fund that was winding down. It was our second closing with CBRE. We levered our track record and a large hard money deposit to beat out a large group of capable buyers who also saw the upside in this large-scale asset (359 units, built in 1986).
Investment Rationale
This was a pure value-add play. The fund which sold this asset was primarily focused on LIH assets and had not invested sufficient capital to maintain this well-situated asset. The Edge sits at “main and main” in one of Kansas City’s better suburbs. But the prior owner had let the tenant profile slip and the property had developed the submarket’s worst reputation, leading to the lowest rent structure among comparable properties. We capitalized $2.5 million at closing for fixups and later we used 100% of the net proceeds of a Supplemental Loan to finish a wide range of asset improvements. We were able to push in-place rents per unit from $582 at closing to $729 per unit by the time the asset was disposed in early 2018.
What We Did
The Edge was a rough ride. We hired and replaced Greystar as manager because their service suffered after their merger with Riverstone in 2015. We also ran into sizable cost overruns on failing systems like wall-mounted PTAC’s, for which replacement units had to be customized to fit the existing wall sleeve. A fire destroyed one of the 16 buildings, disrupting leasing operations as construction muddled traffic flow in and out of the property. But our success pushing rental rates offset all the hurdles we faced. It took time but we completely turned around what had been a LURA asset with a 20% low-income housing requirement.
Results
The deal produced a gross return on invested capital (“ROIC”) of 2.11x and a gross IRR (before the sponsor promote but after exit costs) of 23%.
Tax Consequences
Every member of the investor group rolled their share of the sales proceeds into a gorgeous new asset in Wilmington, NC called Myrtle Landing, via a reverse-1031 tax deferred exchange which closed ahead of the sale of The Edge. We’re happy to report the replacement asset, Myrtle Landing, is well ahead of plan.