11/30/2018 | Case Study
Full Renovation of 1541-1571 Xenia Street
Investment case study of 12 unit property in North Aurora.
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Located in the desirable west side of Colorado Springs between Garden of the Gods and downtown, Red Rock Terrace (the “Property”) has great walkability to grocery, restaurants and entertainment. Views of Pike’s Peak, main road access, and an up-and-coming appeal are a strong draw for renters. This submarket has solid rental demand and low rental inventory creating the ideal dynamic for property owners.
The Property included 23 total units, with a mix of three studios, 16 one-bedroom units and four two-bedroom units. There were four separate buildings, each with a unique unit mix and separate entrances. All buildings were master metered for electricity and water service.
Although located in an extremely desirable submarket, the property was undermanaged and tired. The anticipated work of repairing an aging roof, the uncertainty of an old boiler system, and the future vacancy associated with large increases in rent and unit upgrades served as the risk to the investment. Ultimately, however, DRG and its affiliates (“DRG”) determined the project was well within the scope of our capabilities and the acquisition price discount relative to then-current market values provided significant cushion for the unknown.
The Property was acquired in July 2017 as a joint venture between two partnerships managed by DRG. It was purchased in an off-market transaction, with the price negotiated directly with the seller through a mutual broker acquaintance. We earned our opportunity to purchase the property through our reputation for quick, seamless closes, and our well-known ability to handle difficult operating situations.
Because of the problematic operating history, traditional buyers would likely have had difficulty securing financing for the acquisition. DRG was able to secure financing through our local relationship bank, which enabled a quick close with limited red tape. Given the limited repair and maintenance requirements, DRG chose to finance without a construction reserve and was successfully able to fund all upgrades, unit renovations, and construction through internally generated cash flow.
It took less than nine months to fully stabilize the property, and it was sold almost exactly a year after acquisition. Pre-tax returns on the project were a 54% net IRR, and multiple of capital returned to investors of 1.66x.
Although an extremely successful outcome, in hindsight, we likely left some upside on the table for the purchaser. The unit renovations and property beautification completed by DRG was less substantial than could have been, and we underestimated the submarket demand for truly renovated product.
The buyer for this building did more substantial renovation work and has since realized additional rent increases that more than justify the renovation expense. For this area of town, the additional work would have been worth it.
None-the-less, this was a solid outcome for a relatively straight forward upgrading project that continues to be our bread and butter investment. The exceptional sourcing was essential to making the project happen and remaining the buyer of choice for sellers seeking a smooth exit will continue to be key to our investment business.