UNEXPECTED CHANGES, EXCEPTIONAL OUTCOMES
BUSINESS CHALLENGES
Previously, the Seller of the property had entered a master lease agreement for the entirety of the units at The Valley at Mill Creek. However, due to the impacts of Covid, they informed us that they had not finalized their corporate training program for 2022, leading to their decision to break the master lease.
In addition, there was a legal oversight on the loan documents by our financing partner. They had intended for us to maintain a $407,000 reserve for the project duration but failed to include the terms in our loan documents. Consequently, this prevented them from selling the loan to another investor as is common in the industry. Although technically this was not our issue, it indirectly affected us. If the lender failed to execute their business strategy due to our unwillingness to comply, it would have strained our long-standing strategic partnership and complicated future acquisitions or refinances. Worse still, this could have potentially tarnished the property's reputation from a future lending perspective.
SOLUTIONS
The company’s decision not to renew the master lease was, in fact, a blessing in disguise. It allowed us to overhaul all units at one time rather than as future leases expired and lease them at the prevailing market rate. By doing so, rents increased from $780 to $1,175 within 2-3 months, a significant jump ahead from the initial 18-month plan. We managed to renovate and lease 95% of the units between January and April, a monumental accomplishment by the team.
In addition, the swift increase in rents aided us in our negotiations with the lender. We convinced them that by April, the loan would be even more robust. Instead of contributing an extra $407,000 reserve to the lender that wouldn't be returned until loan termination, we only had to contribute $250,000 until the property was re-stabilized. This amount was released one month after we achieved our performance target. Additionally, we put up a $157,000 construction guarantee to ensure we carried out the improvements, which permitted us to control the funds rather than using a draw. As a result, our finances remained unscathed.
AND now for the BEST PART!
We acquired the The Valley at Mill Creek Apartments as a part of the Dalton Portfolio for $3.52M. Due to the immediate rent hike previously mentioned, the property's value soared to approximately $6.05M, a $2.528M increase. In simpler terms, by April 2022, the apartment complex's worth surged by around 75%!
VILLAGE SQUARE AT OLDE TOWN
FULFILLING OUR VALUES
THE STORY
We successfully secured the property previously recognized as "Mendoza Dela Casa" as a bank-owned asset (a foreclosure), costing roughly $42,000 per unit. According to reports, the former owner had defrauded his lender, procured funds for property repairs, but was suspected of misappropriating those funds. The seller faced foreclosure, consequent bankruptcy, and was found to have perjured himself in court, leading to his current incarceration.
On acquisition, the property was barely 60% occupied. The majority of the residents were considered “bad neighbors”. The living conditions of the tenants were deplorable, to put it mildly. Among the legitimate, hardworking residents, we found that each one had unmet basic needs, neglected by their landlord – necessities like air conditioning, running water, electricity, and functional appliances.
Contrary to its outward state, this property, built in 1993, had a solid structure, reliable plumbing, and mostly functional electrical systems. Our initial step was to remove and replace all roofs, seal all windows, replace the T1-11 siding with vinyl, and give it a fresh coat of paint. We did away with the prison-like fencing, replacing it with painted wood fencing to shield and conceal the property’s air-conditioner units. We also encountered and overcame resistance from the city to replace electric meters while renovating nearly every unit down to the studs. All these renovations were executed amidst a period of escalating inflation, requiring constant value-engineering to maintain budget.
THE TRIUMPH
The property is presently in the final leasing phase, with units renting at approximately $800 - $850 each. We have created a secure environment for upper-level Class C residents by eliminating crime in the vicinity (as this property was the problem). We have provided an affordable housing option that is significantly below the average rent in Augusta. We have introduced a standard of quality that is unparalleled in the Class C space. Our investors are poised for substantial returns at the time of refinancing.
This is The Quattro Way.
KNOXVILLE TRIO A STORY OF PERSERVERENCE & OVERCOMING
THE NARRATIV E
Quattro Capital successfully procured a portfolio comprising 67 units from a second-generation property owner, whose father initially constructed the properties. The previous owner did not have a stellar landlord reputation and the properties were arguably in the roughest condition in North Knoxville. Despite their dilapidated state, the properties had a solid foundation, albeit in need of extensive work. However, it is often from such small-scale owners that some of the best investment opportunities arise.
THE HURDLES
The deal was set to be finalized in March 2020, but a lender withdrew just 12 days prior to the closing date, leaving us with approximately $250,000 in earnest at stake. During uncertain times, the Collateralized Loan Obligation (CLO) market was highly unpredictable. After a six-month delay, we managed to finalize the deal with a Community Development Financial Institution (CDFI) balance sheet lender, acquiring the assets at a basis of around $55,000 per unit.
Quattro typically maintains high liquidity for each project to accommodate unforeseen circumstances that may arise during the due diligence process. This project provided its own set of challenges, as we navigated not only the Covid-19 pandemic, which led to a decline in lease traffic, but also had to manage inflation while sticking to a budget drafted during a pre-inflation period. Nevertheless, we managed to control cost overruns and reallocate budgetary funds effectively.
THE OUTCOME
Quattro successfully renovated approximately 50% of the units to a Class B- level, emerging as a leading contender in terms of both rent and quality in the sub-market. We sold the portfolio to a larger, single operator at approximately $92,500 per unit. The prospective buyer was appreciative of the improvements made and plans to complete the renovation project and hold the properties for cash flow purposes.
Our strategy of buying from small-scale operators and selling to larger ones is a key approach we use to drive capitalization rate (cap rate) compression in our projects. The common theme her is buy low and add value to sell high!
KINGS GLEN APARTMENTS
Triumph Amidst Challenges
THE CHALLENGE
In March 2020, Quattro Capital took on the task of revitalizing a promising 36-unit property from the late 60s. Located in a Class D neighborhood and set to transition to a Class B development, this project had potential. But with about 40% of the residents posing a challenge due to crime and disturbance, our plan was clear - evictions and renovations would be paramount. Enter Covid-19 and its consequential eviction freeze, and suddenly, the bulk of these problematic residents stopped paying rent.
OUR RESPONSE
Despite facing a negative cash flow for almost a year, our commitment to our lender never wavered. We shouldered the financial strain, infusing the necessary capital and ensuring our obligations to the lender were met. Quattro Partner, Maurice Philogene, executed our strategy, blending a mix of cash incentives, charity-sourced rent assistance, and police intervention to reset the tenant dynamic.
THE OUTCOME
Our resolute efforts bore fruit. Not only did we lift the average rent from $700 to $900 within 18 months, but we also managed to sell the property at a value of $3,500,000 — a substantial growth from its $2,500,000 acquisition cost.
ATLANTA, GA
