In September of 2014, Collins Crestmont LP purchased a 188 unit apartment complex in North Arlington, TX named The Crestmont Apartments. The partnership consisted of six individuals, five of which had worked with each other in the apartment industry, and one additional family member. The prior owner of the property had completed an extensive renovation of the property, and was willing to sell it directly to the partnership at a price determined by the high-end of three Opinions of Value by reputable Real Estate Brokers.
When the Opinions of Value were received, the Seller set a price of $7,250,000, or $38,563 per unit. This equated to a 4.82% Capitalization Rate, based upon trailing 12 month financial statements, or a 6.79% Capitalization Rate, based upon trailing 6 month financial statements. It should be noted that a few of the partners expressed concern that the price might be too high, as there were several sales in the DFW area in the previous months that had a lesser price per unit. However, all partners agreed that they liked the condition of the property and the neighborhood, and that the potential opportunity out-weighed the cost per unit price.
Our initial objective was to create a retirement investment vehicle for the partners and at the outset we agreed upon a ten year holding period. We shopped for financing opportunities, and obtained one quote for an agency loan (with one year of “interest only”) and several quotes for CMBS loans. We ultimately decided on a CMBS loan, as it had a lower interest rate and five years of “interest only” payments, which had a very positive impact on the anticipated yield to the partners on their investment. The downside to this type loan was that we could not refinance like we could in the agency loan, and that we had defeasance costs if the loan was prepaid early.
We structured the deal with a 7% Preferred Return to investors, with 25% of future remaining profits earned by the General Partners, and 75% of future remaining profits earned by the investors. Our anticipated first year cash distributions to the partners were estimated to be 16.9% on their investment, yet we actually distributed amounts that equated to 21.5%, paid quarterly. Our second year cash distributions were 20.7%, and our third year cash distribution were 25.7%. Our initial Investment Summary projected a potential sales price in year 9 (year 2022) to be $12,328,702, yet we ultimately sold this asset in year 3 for $12,450,000. Even though we had substantial loan defeasance costs that reduced our profit, we returned to our investors 100% of the original equity in the amount of $1,728,613, profits in the amount of $3,526,350 and cash flow in the amount of $1,177,023 (paid quarterly). That equates to 100% return of equity and a 272% rate of return to our investors on their equity. The investment was an incredible success for all involved.
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Legacy Opportunity Group, LLC
16051 Addison Road
Addison, TX 75201