Website: www.utrailsoxford.com

FKA Sterling (Dinerstein) – University Terrace

Date of Construction: 1999

Project Size: 156 units/492 beds

Close date: 4/30/10

Terms: Cash at Closing (subsequently refinanced)

Total Balance Sheet at closing: $7,300,000

Going-in cap rate based on T-12: 8.34%

Going-in cap rate based on T-6(2011): 12.37%

Occupancy at Closing: 85% (physical)

Pre-lease at time of closing: 27%

Occupancy at Fall 2011 Opening: 99% (physical)

Effective Yr-1 Rental Income Increase: 24%

Forecasted Cash-on-Cash Yr-1: 19.23%

In late 2009, TEXLA identified a distressed student housing asset in Oxford, MS.  It was developed in 2001 as a Sterling University brand and at various times had been marketed by the original developer. For a variety of reasons, the project was never sold. Similar to other student housing markets, Oxford became over-built in the latter part of the decade. By the time of TEXLA’s purchase, rents had contracted substantially. However, the leverage on the property reflected the project’s original rent projections. The debt service simply wasn’t sustainable at depressed rental rates. After several capital infusions by the developer, it decided it was no longer willing to support the project financially.

Through a long-standing brokerage contact, TEXLA learned the asset was controlled by a special servicer, Centerline, and that gaining control of the asset would necessitate working with the special servicer and the original sponsor. In an attempt to engage Centerline, TEXLA made a blind offer on the property. After several weeks of correspondence, Centerline finally engaged.  In January 2010, a letter of intent was executed for TEXLA’s purchase of the property.

In April 2010, the principals of Vermilion and TEXLA closed on the acquisition of the property. Because of its poor lease-up under previous management, debt financing from Freddie Mac and Fannie Mae was unavailable, and they closed the transaction with all cash.

With TEXLA’s purchase, the property’s basis was adjusted down to approximately 60-70% of the original value, a figure much more sustainable vis-a-vis the property’s cash flow.

In concert with the closing, TEXLA established a new bus service to the property. Previously, the bus service had passed the front of the property but did not actually stop/pick-up and drop-off students. TEXLA worked quickly to build a relationship with the Oxford University Transit office to have it approve bus service for the property, which was achieved on the first day of ownership.

This change had an immediate positive impact on the property’s bottom line of approximately $40,000 annually. It allowed for the elimination of cost associated with staffing, maintenance and insurance for the passenger van previously operated by the property. The bus now runs every 7 minutes and the property is the “first stop off and last stop before campus.”

The next major focus was the units themselves. TEXLA made a conscious decision on what type of product it wanted to sell and to associate with the University Trails brand. TEXLA believed that investing $500,000 in new furniture, carpet, paint and tile would draw students to the property. While the property was 27% pre-leased at the time of closing, its closest competition in terms of age, etc. was close to 80% and rising. About a month later, it hit 100%. TEXLA decided, based on analysis of supply/demand in the market, to raise rents (approximately 10%), and to deliver the new carpet, flooring, furniture, etc. for each unit. After the makeover of the model/show unit, the response was overwhelming. Leasing velocity showed noticeable improvements and by mid June, the property was approximately 58% pre-leased. To improve curb appeal, TEXLA painted an accent color on the club building, added flowers around the community building and improved the landscaping. TEXLA also purchased new and/or repaired all of the existing workout equipment, and added new pool furniture. TEXLA also launched a new University Trails website at the time of close which helped give the property an edge over the rest on the online market. Further, it also helped allow the property to track web traffic and follow up on all online inquiries.

Before                                                      After

Before                                                      After

Before                                                      After

Forty five days following closing, TEXLA met with a key Freddie representative and outlined what had transpired since closing, highlighting the property’s successful lease up. He asked that leasing reports be sent to him weekly. On July 19th, the property passed its historical mark in terms of leasing. At that point, Freddie Mac fully engaged.

The final hurdle was turnover. Leases expired on August 6, and move-in occurred on August 15. Over the course of the intervening 9 days, TEXLA turned 110 of the 154 units with complete carpet, paint, flooring and furniture. Only two residents couldn’t move in on commencement date, and TEXLA bought them dinner and a nice hotel for the night.

The loan closed in September 2010. The positive leasing continued, and ultimately, the property reached 99% physical occupancy.  In order to close the loan, the property had to achieve a rental income of $136,558. September rental income was $162,873, exceeding the threshold by nearly 20%.

Update: A supplement loan totaling $11M was placed on the property in March 2014 allowing for the return of owner’s equity at near a 3 x multiple.