Links at Gleneagles was one of the higher-end properties in the transaction. | Courtesy CBRE

Interest-Rate Jump Challenged $199M Apt. Deal

Carrie Rossenfeld Finance & Capital Markets

Structuring a nearly-$200 million financing deal is not without its challenges, CBRE SVP Scott Peterson tells SoCal Real Estate. As we recently reported, CBRE Capital Markets’ Debt & Structured Finance team arranged a $199 million loan on behalf of Strata Equity Group for its purchase of an 11-property apartment portfolio located within a master-planned community of St. Charles, Maryland, 13 miles from the Washington, D.C. Beltway.

We spoke with Peterson about the uniqueness of this transaction and the challenges it presented to him and his team.

SoCal Real Estate: What was unique for you about this transaction?
Scott Peterson: Strata Equity Group, which is based in San Diego, has had an aggressive buying strategy for the last couple years. The firm has been expanding what was traditionally their footprint on the West Coast – California, Phoenix, Denver – to include some larger portfolios in the Southeast, which allowed them to gain some traction in the Northeast. Managing from San Diego and having one property in the D.C. area doesn’t create a whole lot of economies of scale, but buying 11 properties does.

What was unique in this transaction is that all 11 properties are in one submarket: Waldorf, Maryland. It’s also unique in that you’re basically buying a majority of the apartments in the market, and they’re all competitive to one another. So, I think that was a challenge – because you’re basically controlling and buying a market – plus, you’re talking about a $300 million-plus portfolio.

The transaction also speaks well to our platform. We have a program that we internally call reciprocal advantage. When Strata, a good client of ours in San Diego, goes across the country and gets approached by the sales group in Baltimore – who didn’t know who Strata was – that client is immediately identified as having a relationship with us, so the Baltimore team started calling us and asking who Strata was. Bringing in our counterparts in the D.C. market who have transacted in Waldorf and know the market allowed us to educate the buyers through them on the market, in addition to what debt might be available and the strengths and weaknesses of financing these deals. It was a good team effort.

Also, Strata self-manages most of its portfolio out west, but there was an existing management company onsite in Waldorf named Kettler that has been in place since basically the beginning, so Strata ended up retaining it as property manager given its history with all 11 assets. This created a lot of economies of scale.

What are the challenges you encountered in structuring such a large financing deal on so many different properties?
The biggest challenge was that interest rates had jumped pretty dramatically during the process, so there was a small price reduction because of that jump. The buyer is more cash-on-cash focused, so an interest-only loan was important to them. They also like to stage their maturities, and having 11 properties whose loans all matured at the same time would have added more risk in their portfolio, so we tried to do a 12-year loan, full-term, interest only. We originally looked to 70 percent leverage, pricing it accordingly, but eventually dropped to 65 percent and got a better rate. Dropping the leverage decreased the risk from a lender standpoint, and we were able to get a very aggressive spread from Fannie Mae, with whom we are a direct lender.

How else did the distance between your office and the buyer and the properties’ location come into play?
Strata is literally across the street from us here. Physically and business-wise, our relationship with them is very strong. Utilizing our counterpoints on the financing side, as well as our sisters and brothers on the sales side of CBRE – that’s where we were able to bridge that gap. One of the advantages we had in this deal is that Fannie Mae and Freddie Mac both reside in the D.C. area, so we were able to – with the two primary principals of Strata – have our team meet us there and give us a tour of the market and then visit Fannie Mae and Freddie Mac, sit in their offices, and explain why we are doing this deal, why it’s a great deal, and why they should be aggressive on pricing and rate.

What else should our readers know about this transaction?
We had another challenge: The construction dates on the properties in this portfolio ranged from the 1970s to 2015. That’s a wide range of ages, but it plays off well. Not one of the assets is exactly the same. Basically, Strata has a pool of assets to rent to everyone from the lower-end renter to the top-end renter. One of the most interesting things to know about the transaction is that it was a little bit of a challenge to sell 11 properties for $300 million all in one market. You get a higher return on the older properties and less of a return on the newer ones. Most buyers want properties in a portfolio to be the same age, so Strata was the right group to do that.