Although quite an unusual transaction, the sale of the Luther View Apartments in Pacific Beach, CA (foreground) offers multiple lessons for apartment investors. 

Part 2 – Not All That Glitters Is Gold

By Robert Vallera CCIM

• Adding value with a properly executed multi-party bidding process
• The importance of selecting the right buyer
• How broker-client brainstorming over tactical options added value

Asking 30x Gross Scheduled Income!

My previous post, Solving A Valuation Puzzle, Part 1, introduced the most unusual apartment sale of my career, the 48 unit Luther View seniors apartment complex three blocks from the ocean in Pacific Beach, CA. The seller, Christ Lutheran Church planned to impose a 30-year rent restriction to preserve affordability for the residents. With the existing rents being only 1/3rd of current market rents, we needed to find a way to structure the future operations and sale to avoid having the seller absorb a 2/3rds reduction in value.

The asking price of $9,500,000 equated to $198,000 per small one-bedroom unit. On the surface, this appears to be bargain-basement pricing for apartments near the beach. However, most of these units were rented at $550 per month, or $6,600 per year. The asking price was an astounding 30x the annual rent!

What Do You Do With 13 Purchase Offers?

Our extensive marketing campaign, supplemented by the favorable publicity we generated, brought in a total of 13 offers. Eleven offers were at or above $9,000,000. The seven strongest buyers were included in a best-and-final bidding process.

When one of our listings attracts multiple strong offers, we frequently conduct a best-and-final bidding process designed to maximize the price and terms of the sale. Frequently, the highest offer does not include the best terms, and the most aggressive bidders are not always the most likely to perform on their promises.

In an unusual and welcome outcome, one buyer singled themselves out as the highest bidder, offered the strongest terms, and drum-roll please… appeared to be the best prospect to close the transaction and continue the seller’s altruistic mission.

Surviving Not One, But Three Hurricanes

Retirement Housing Foundation (RHF) headquartered in Long Beach, CA touted their experience owning and operating 192 senior apartment communities across the United States. As we progressed through escrow, a half-dozen of those properties ended up in the path of major hurricanes that in short succession made landfall striking Houston, Florida and Puerto Rico. Nonetheless, RHF made good on their commitment, closing the transaction on time and at a price of $10,110,000, exceeding the asking price by $610,000.

Quality, Not Quantity Proves The Defining Factor

While I’m proud of our technical skills, the most important takeaway is the importance of the quality time that we invested with the seller, exploring options to increase their sale proceeds without compromising their philanthropic goals. Those back-and-forth discussions allowed us to fully harness the power of sophisticated financial modeling to craft offering terms that met the seller’s social mission while dramatically increasing their sales proceeds. That, and selecting a high caliber purchaser, Retirement Housing Foundation.