Later this month the Raleigh apartment complex Manor Six Forks will be sold at auction to the highest bidder, an outcome that might seem puzzling given the healthy state of the Triangle apartment market.
Apartments have been the regions best-performing commercial real estate sector over the past several years, with both occupancy levels and rents rising at a healthy clip. Several new apartment projects are in various stages of development within two miles of Manor Six Forks, which sits at the intersection of Six Forks Road and Atlantic Avenue, an indication that developers believe demand in that part of the city remains strong.
Indeed, although Six Forks Manors 14,000 square feet of retail space remains vacant, more than 90 percent of its 298 units are occupied.
But the markets overall improvement couldnt save Manor Six Forks from foreclosure, in large part because its problems date back to before it opened.
There was tremendous cost overruns when it was constructed, thats really the major source of the problem, said Griff Garner, who was one of a number of investors from the Greenville area who provided much of the equity for the project.
Manor Six Forks was developed by The Boylan Cos., a Raleigh real estate company that has built several condo complexes, subdivisions and more than a thousand apartments in the area. In 2006, the investment group behind the project paid $1.35 million for 25 acres.
In July 2008, the group borrowed nearly $36.6 million from Capmark Finance to finance the construction of the project. The note was insured by the U.S. Department of Housing and Urban Development.
Garner said the cost overruns escalated dramatically in the six months before Manor Six Forks opened in April 2010, which led to a number of contractors filing liens against the project.
There werent enough HUD funds to pay people off, Garner said.
One of the financial investors in the project was the surety bond holder, and Garner said that investor stepped in and paid off all but five of the contractors who had filed liens. That allowed construction on the project to be completed.
Revenue falls short
Once open, Manor Six Forks owners ran into another problem.
You couldnt command the rental rates that were forecast, Garner said. I think that might be somewhat from the fact that its not an A location, its really a B+ location.
The cost overruns, combined with the lower than anticipated rents, meant that despite being more than 90 percent occupied the owners couldnt make the payments to HUD. The investors were also unwilling to put in additional cash to cover the shortfall, which led HUD to declare the note a problem loan.
And when they have a problem loan they sell it at auction, Garner said.
Last summer Lenox Mortgage XVII LLC, a Massachusetts investor, acquired the note at auction for $30.3 million. Lenox began foreclosure proceedings not long after that, and Manor Six Forks owners filed for Chapter 11 bankruptcy on Aug 12.
According to court records, Manor Six Forks is bringing in about $285,000 a month in rents and other fees from tenants. Garner said the complex has seen some rent increases during the period it has been open.
Whats it worth?
Potential buyers now have until 4 p.m. on March 18 to submit bids. Lenox has made a stalking horse bid of $37.1 million, which means that any rival bidders must submit a cash bid of at least $37.2 million. If an auction occurs, it will happen on March 20.
Garner said the auction has drawn a fair amount of interest from potential bidders since being announced. Manor Six Forks is likely attractive to real estate investment trusts and other institutional investors with enough cash to be patient and wait for rents to rise and for the retail space in the complex to lease up.
Garner said he doesnt expect the investors to get back any of the equity they put in to the deal. Lenox has a secured claim of $39 million, and there are more than $10 million other claims against the project that would need to be repaid before the investors received a dime.
There just wasnt enough equity dollars to dig ourselves out of the hole, Garner said. For one of these REITs or one of these apartment investors with lots of cash, its probably a good buy.