Cash Out Refinance Case Study - Kensington Ridge
Simple Per Annum Return (to date): 14.46%
NCREIF Benchmark: 7.8%
Net Equity Multiple: 5.27x (refinancing proceeds + unrealized gains)
The Opportunity
Kensington Ridge is a 150-unit apartment property that was owned by a local partnership whose original purchase was poorly timed, and the group had insufficient capital to complete their business plan. This led to significant deferred structural and cosmetic maintenance. When the property was listed for sale, most buyers avoided it due to these issues. This deferred maintenance also deterred most lenders, since occupancy was 80% at best. However, Kensington Ridge was located in the center of an obvious growth corridor, it had fundamentally good construction quality, and it was well-located within its submarket.
The Execution
We closed the purchase of Kensington Ridge late in the afternoon on New Years Eve using CMBS debt and immediately began investing in curing deferred maintenance and in exterior and interior upgrades. Five fires that broke out during the initial ten-year hold period. Two of these fires took entire buildings out of service for more than a year.
Despite these unwelcome surprises -- and the high costs to insure this property due to its loss history -- we continued with our $1 million upgrade program which involved all new roofing property-wide, new siding, new windows and parking lots. Interior upgrades included new stainless steel appliances, cabinets, countertops, fixtures, lighing, flooring and paint. Within ten years, we doubled gross income and quadrupled NOI. This far exceeded our original business plan.
In 2023, we refinanced the acquistion debt, and the proceeds were sufficient to return 100% of initial capital plus a multiple of 1.85x. To date, we have produced a 14.46% simple per annum return, and the property is currently producing strong distributable cash flow. We see additional upside through continued interior and exterior upgrades.
The Lesson
The condition of the asset and the dearth of financing options created a buyer's market for this property. If we had allowed ourselves to be distracted by the condition of the asset and the financing challenges this created, we would not have been able to participate in this market's future promise. Although turning this asset around would involve an enormous amount of effort over many years, upgrading this property also meant that we could participate in the local market improvements we envisioned with an extremely favorable basis and downside protection.
Tennis Court Prior to Pickleball Conversion
Tennis Court After Pickleball Conversion
*Unaudited. Past performance is no guarantee.