VOL. 123 | NO. 34 | Tuesday, February 19, 2008
$16M Bid Chosen for Two Apartment Complexes
By Andy Meek
Two Memphis apartment properties originally developed with low-income renters in mind - and whose cash-strapped owners filed for bankruptcy protection last year - appear likely to be snapped up soon by a private equity fund for $16 million.
The apartment complexes, which have a combined 532 rental units, are the 12-acre Stonegate Apartments in Raleigh and the 15-acre Autumnwood Apartments in southeast Memphis. The $16 million offer represents a bargain for the debt-laden owners of the properties, which a recent appraisal determined to be valued at about $14.4 million. The owners, Cornerstone-Cameron and Stonegate Inc., bought the two properties in 1997.
The offer was made by White Eagle Properties in response to a solicitation of bids by CB Richard Ellis, the broker in the apartments' potential sale. That bid was chosen as the highest and best offer among 53 interested bidders, a number that was whittled down to seven official bids before a final bid was chosen.
"We have been marketing the properties, as was approved by the court, and we've chosen a buyer," said Blake Pera, a senior vice president at CBRE.
The Bank of New York Trust Co., the indenture trustee in the apartments' bond arrangement, filed a motion in bankruptcy court Wednesday asking that the sale be allowed to proceed. The bank's status as indenture trustee means it has the responsibility, among other things, of making sure the apartments' owners comply with the terms of their loan arrangement.
Finding a solution
The series of events that led to the impending sale to pay off debts that the properties racked up began with a federal lawsuit last year that asked the court to impose a sale. Bills were going unpaid, and the properties began to have the makings of a financial boondoggle.
Then in August, on the same day a scheduling conference in that suit was due to occur, the apartments' ownership filed a Chapter 11 bankruptcy petition. That put the lawsuit on hold and led a bankruptcy judge to devise a two-pronged solution to the case. The apartment owners would be allowed to draw up a business reorganization plan to try to satisfy the bankruptcy court.
At the same time, a hunt would begin for suitors to buy the apartments, which for at least the last two years have seen occupancy and rental revenue dwindle. If the reorganization plan was not approved, the sale could go forward.
The bid's acceptance seemingly would bring to a close the apartment owners' Chapter 11 case and the financial strain that has dogged both the properties and the bondholders who haven't been paid in almost three years.
The sale still awaits a final green light from the U.S. Bankruptcy Court in the Western District of Tennessee.
The 1997 sale of the two properties to Cornerstone-Cameron and Stonegate Inc. was financed with $22 million in bonds issued by the Health, Educational and Housing Facility Board of Shelby County.
Crime at the heart
Part of the reason the original business plan for the two properties had to be revisited - and why the properties quickly began losing money - was because of circumstances beyond control. Area crime, for example, was the cause of a big spike in unforeseen costs at the Autumnwood property.
"In the summer of 2006, the crime issue in the neighborhood became significant," said Douglas Margerum, the president of Maryland-based real estate management firm Equity Management Inc. EMI has managed the two apartment properties involved in the bankruptcy.
His comments are recorded in a September deposition that was taken as part of the bankruptcy case.
"We actually had at one point a gang activity that amounted to a gang fight, if you will, where two competing gangs somehow showed up at the property and ended up with a significant brawl in the parking lot," Margerum said. "It was dealt with immediately by police. Unfortunately, it also created some fear with the residents."
It also required the management company to start shelling out more in security costs, which climbed from about $30,000 a year to between $100,000 and $125,000 a year, according to the 2007 deposition.
Other examples included, at one point, a large uptick in vacancies. During the summer of 2006, the apartments' ownership saw between 30 and 40 Hurricane Katrina evacuees who had moved into the apartments leave in the space of about 60 days, in addition to normal turnover.
"All of a sudden," Margerum said, "our vacancy went through the roof."
In a marketing proposal for the two properties that CBRE e-mailed to more than 5,000 potential buyers, it was noted that Stonegate sits about three miles from a 125-acre site in Frayser recently bought by Nike. The sportswear and equipment manufacturer is turning that site into a $107 million distribution center.
Autumnwood, the e-mail proposal noted, is "adjacent to the Nonconnah 'High-Tech' Corridor, one of the fastest-growing Class A office corridors in the (Metropolitan Statistical Area)."