Silk Street Apartments
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Transcript of Silk Street Apartments
SILK STREET APARTMENTS
Silk Street Apartments1 Hogg AvenueKansas City, Mo
A Substantial Rehab 221D-4 project180 units, 21 Buildings, with retail space
A revitalization project
A direct-to-firm application
MAP Training Material
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SILK STREET APARTMENTS
1 HOGG AVENUEKANSAS CITY, MO
CASE MATERIALS INDEX
1.WHEELBARROW SUMMARY REPORT*2.WHEELBARROW LENDERS DOCUMENTS REPORT*3.HUD NARRATIVE (AKA LOAN COMMITTEE SUBMISSION)*4.SLIDES
*MATERIALS TO BE HANDED OUT FOR REVIEW BEFORE TRAINING;OTHER MATERIALS TO BE DISTRIBUTED DURING THE TRAINING
SILK STREET APARTMENTS
SILK STREET APARTMENTS
WEAKNESSESSPONSORSHIP HAS NO EXPERIENCE WITH SIMILAR REHAB/TURNAROUND PROJECTS
THE PRINCIPALS HAVE LIMITED EXPERIENCE COMPLEX REHAB INVOLVING A COMPLETE LEASE-UPSOME OF THE PRINCIPALS HAVE LOW CREDIT SCORESTHE OVERALL AMOUNT OF WORKING CAPITAL IS LOW
CONTINGENCY IS CITED AT THE MAX, BUT THIS IS ONLY TRUE UNDER THE PRE-RISK MITIGATION GUIDELINES.
REHAB SCOPE OF WORK IS LIMITED
PROPERTY IS FUNCTIONALLY OBSOLESTE , UNATTRACTIVE AND UNDER-MAINTAINED“AS IS” OCCUPANCY IS LOW (48%)“AS IS” NOI IS NEGATIVEALL EQUITY IN THE DEAL COMES FROM THE “AS IS” VALUE
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SILK STREET APARTMENTS
Weaknesses (continued)ENVIRONMENTAL ISSUES - MOLD AND ASBESTOSLOW OCCUPANCY IN PMA (80% OCCUPIED )DETERIORATED AND UNMAINTAINED SURROUNDING PROPERTIES
SUBMARKET PRIMARILY 30+ YEAR OLD PROPERTIES, SOME WITHSIGNIFICANT DERERRED MAINTENANCE.
NO PMA POPULATION GROWTH PROJECTED
UNRELATED & DETERIORATED COMMERCIAL PROPERTY ON THE FRONTAGENOT PART OF THE OWNERSHIP, LEGAL DESCRIPTION, OR SUBJECT MORTGAGE.
NEGATIVE NOI AND THE “AS-IS” VALUE IS MORE THAN THE EXISTING INDEBTEDNESS.
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STRENGTHS
OWNERSHIP HAS $3.2 MILLION IN LIQUIDITY
GENERAL CONTRACTOR HAS PREVIOUS EXPERIENCE IN REHAB PROJECTS.
GENERAL CONTRCTOR IS STRONG FINANCIALLY.
UPON COMPLETION OF THE PROPOSED RENOVATION, THE SUBJECT WOULD BE IN MANY RESPECTS SUPERIOR TO MOST OF THE APARTMENT COMMUNITIES IN THE PMA.
THE PROJECT WILL HAVE NO ADVERSE AFFECT ON OTHER HUD INSURED APARTMENT PROPERTIES IN THE MARKET AREA.
THE MANAGEMENT COMPANY AND CONTRACTOR ARE CONSIDERED TO HAVE THE FINANCIAL CAPACITY EXPERIENCE, MOTIVATION AND INTEGRITY TO BE SUCCESSFUL IN THE LONG-TERM OPERATION OF THE SUBJECT PROPERTY.
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MORTGAGE CREDIT MODULE
OWNER EXPERIENCE
RESUMES?
OWNER HAS LIMITED EXPERIENCE
NO EXPERIENCE WITH SIMILAR REHAB OR DISTRESSED PROJECTS OF THIS SIZE
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MORTGAGE CREDIT MODULE (CONTINUED)
FINANCIAL CAPACITY:
WOKING CAPITAL ANALYSIS: (EXAMPLE)
CURRENT ASSETS/CURRENT LIABILITIES = 2% OR GREATER
Current Assets = $1,525,500 (FROM STATEMENTS)
Current Liabilities = 525,500 (FROM STATEMENTS)
Working Capital = 2.9%
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VALUATION MODULETHE PROJECT HAS NEGATIVE NOI AND WILL CONTINUE TO OPERATE AT A NEGATIVE NOI DURING CONSTRUCTION. WHAT ARE THE ACCEPTABLE TECHNIQUES TO VALUE A NEGATIVE CASHFLOW PROPERTY?
RESIDUAL NOT PREFERRED, BUT ACCEPTABLE IF NO DATADIRECT COMPARISON WITH SIMILARLY DISTRESSED PROPERTIES PREFERRED METHODIS THE INCOME & SALES COMPARISON “AS IF STABILIZED” APPROACH USEFUL?IS THE PURCHASE PRICE A RELIABLE INDICATOR OF VALUE?ANSWER: APPRAISER DID MORE THAN HE NEEDED TO, AND SUPPORTED THE CONCLUSION MORE THAN ADEQUATELY
WILL THE LIMITED REHABILITATION SCOPE OF WORK CURE THE FUNCTIONAL OBSOLENSCENCE?
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VALUATION (CONTINUED)
MARKET RELATED ISSUES:
EMAS OPINES INSUFFICIENT GROWTH IN DEMAND TO ADDITIONAL UNITS IN PMA.
THE PROJECT IS LOCATED IN A MARKET WITH A VACANCY OF 20%, YET THE MARKET STUDY IDENTIFIES PENT-UP DEMAND. IS THIS POSSIBLE AND CAN YOU BASE DEMAND SOLELY ON PENT-UP DEMAND?
WILL THE REHABILITATION AND CHANGE IN OWNERSHIP OVERCOME A PROPERTY STIGMATIZED BY A BAD REPUTATION?
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VALUATION (CONTINUED)COMMERCIAL PROPERTY NOT PART OF THE PROJECT:
LACK OF CONTROL MAY NEGATIVELY AFFECT THE PROJECT
UNDESIRABLE OR UNSAVORY COMMERCIAL TENNANTS COULD BE A PROBLEM
DEFERRED MAINTENANCE COULD BE A PROBLEM
PARKING AND TRAFFIC RELATED ISSUES COULD BE A PROBLEM
POSSIBLE MITIGANTS:
BUILDING DESIGN COULD POTENTIALLY MINIMIZE THE COMMERCIAL PROPERTY’S IMPACT
LANDSCAPING OR SITE DESIGN TO SEPARATE OR OTHERWISE MINIMIZE THE POTENTIAL IMPACT
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VALUATION (CONTINUED)LOCATED IN AN OLDER, FULLY DEVELOPED PART OF KANSAS CITY:
MAJORITY OF SURROUNDING PROPERTIES ARE 30+ YEARS OLD, CLASS B & C PROPERTIES
MAY BE AN OVER-IMPROVEMENT FOR THE MARKET.
DOES IT MATCH IT’S SURROUNDING ENVIRONS?
COMPARABLES WILL LIKELY BE FROM OUTSIDE OF THE PMA BY NECESSITY, THEIR RELEVANCY MUST BE SCRUTINIZED.
MITIGANT:
NO NEW PRODUCT PLANNED, THE SUBJECT WILL LIKELY HAVE LITTLE COMPETITION DURING LEASE-UP.
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VALUATION (CONTINUED)
MEDIAN HH INCOME IN PMA IS LOWER THAN THE KANSAS STATE AVERAGE, AND GROWTH HAS BEEN SLOW.
AFTER REHAB, RENTS WILL INCREASE. THE PROPOSAL INDICATES A RISE OF APPROXIMATELY $50/MO/UNIT. IS THIS SIGNIFICANT?
WILL THE ANTICIPATED 86 CURRENT TENANTS REALLY STAY AFTER COMPLETION? WILL THEY BE ABLE TO AFFORD THE NEW RENTS? HOW WILL THIS IMPACT THE ABSORPTION ANALYSIS?
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VALUATION (CONTINUED)
ENVIRONMENTAL ISSUES:
ASBESTOS, LEAD BASED PAINT AND MOLD IDENTIFIED ON SITE.
OLD FEMA FLOOD DATS. (AND FLOOD ZONES ON THE NORTH AND WESTERN EDGES OF THE SITE INDICATE FLOODING IS AN ISSUE)
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DECISION
WHAT WOULD BE YOUR DECISION?
WHY?
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SILK STREET APARTMENTS
The Answer THE NATIONAL LOAN COMMITTEE WAS UNABLE TO APPROVE THE ISSUANCE OF THE FIRM COMMITMENT FOR SILK STREET APARTMENTS. THE NLC RECOMMENDED THAT PRIOR TO FURTHER CONSIDERATION OF THIS PROJECT, THAT THE LENDER TAKE INTO ACCOUNT THE FOLLOWING: 1. THE ANCILLARY INCOME IS TOO HIGH IN PROPORTION TO THE RENTAL INCOME.2. THE DEVELOPER DOES NOT APPERR TO HAVE SUFFICIENT INVESTMENT IN THE PROJECT.3. THERE IS NO EVIDENCE THAT THE DEVELOPER HAS SUFFICIENT EXPERIENCE TO REHABILITATE A PROJECT THAT HAS SUCH A TROUBLED HISTORY.