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- Article from Commercial Investment Real Estate Magazine (March/April 2008)

Location: Albany, Ore.
Purchase Price: $1,845,000
Units: 40; 6 buildings
Cost of Renovations: $175,000
Projected Return: 15 percent IRR after five-year holding; cash-on-cash return after improvements: 8.5%

A $2 million property with an image problem in a secondary market might seem a hard sell and it was initially, says Tom Davies, CCIM, senior investment broker and partner with Norris & Stevens in Portland, Ore., who was looking for a 1031 replacement property. "My client was looking for a cash-flow deal, so this type of building was not within his initial parameters. He was comfortable with multifamily but not with a value-add building. The reduced cash flow during the first year of renovations was a hurdle we had to get him to accept."

The property's overflowing trash container had made the local newspaper's front page, along with tenant complaints. Owned by a pair of squabbling partners, the property suffered from management and maintenance problems. Davies says the asking price was high considering the building's physical condition. However, a list of renovations that he developed led to a $255,000 price reduction for his client.

After selling the buyer on the property, it was time to sell the bank. "Financing was difficult, because Albany is a secondary market and the property had a poor operating history," Davies says. Several lenders rejected the property, despite a supportive rent survey that revealed rents as much as $100 below market in an area where most buildings were 95 percent occupied. Finally a bank with a strong local presence and experience in this market approved the deal. Davies' company oversaw the work completion. "The renovations preserved the value of the asset, the curb appeal, and the ability to raise the rents," Davies says.

Davies played a big role in making this deal happen, but, he says, that's what it takes. "These deals require considerably more due diligence than typical transactions. I had to act as a general contractor to determine the total dollar amount required to bring the property back in line with the market and determine a reasonable purchase price."

— Tom Davies is a senior investment broker and partner who specializes in apartment sales and management.

He can be reached at 503-225-8449.