Creekside South Case Study

Acquisition 

Lone Star Capital acquired The Commons on August 23, 2019. After multiple failed marketing attempts, the seller  realized that their pricing expectations were too high. Lone Star Capital’s patient tracking of the opportunity positioned us as the natural buyer to transact once better pricing was presented. After further negotiation, we signed the contract for $5,175,000 ($26,403/unit). 

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Financing 

The Commons was acquired and Capex funded with a short-term bridge loan at 80% loan-to-cost (LTC). Arbor provided the $5,300,000, 2-year bridge loan at LIBOR plus 3.25% (all-in rate of 6.0%). A bridge loan was the only financing option since the property was roughly half vacant and had substantial deferred maintenance. 

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Property 

The Commons is a 196-unit class C- multifamily property located at 3333 Nichols Drive, Texarkana, Texas 75503. Built in 1973, the property is a workforce housing asset in a lower income neighborhood. High vacancy, low rents and poor collections, and deferred  maintenance were ongoing problems, contributing to the discounted purchase price.

Before Lone Star acquired it, The Commons had a checkered history and poor market reputation, struggling with a carousel of four property management companies in four years, as well as massive built-up deferred maintenance. This problem property drew problem tenants and significant crime and safety issues. At takeover, occupancy was around 50%, with very low quality tenants and rock-bottom lease rents. 

However, the asset’s location at a prominent intersection in the tertiary market of Texarkana, Texas pointed to significant potential. In smaller markets like Texarkana, demand can be uncertain and fixing a reputation can be tough. Despite these challenges, Lone Star seized this opportunity: first, due to attractive going-in basis, and second, since it  built on our strength in overseeing large renovation projects and turnaround business plans. 

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Capital Expenditures 

Nearly every vacant unit was classified as “down” – uninhabitable and missing essential components like flooring and appliances. In addition, roughly 20 units had some level of mold damage in need of remediation. Active roof leaks demanded attention before to any make-ready work could be done to lease the units. At least half of the roofs had minor or major leaks and a formidable storm early on in our ownership revealed and exacerbated many of these issues. Today, through constant attention, the property has no reported roof issues. 

Addressing these capital needs required a substantial budget. Capital expenditures to date amount to $2,344,750 ($11,963/unit), with a substantial focus on “down” units and deferred maintenance to roofs and plumbing. 

One aspect of the business plan that proved greater than expected was how much deferred maintenance was needed  in the occupied units as well as in the infrastructure. We inspected every single occupied and vacant unit during due  diligence, but failed to account for the full extent of repairs required when existing tenants moved out. Despite this, we were very successful in turning over units to a premium finish and commanding the highest rents in the market for comparable properties. 

By far the most noteworthy deferred maintenance item lay in the old cast iron waste lines, which are lined with many  layers of rust. If this rust is left to dry, it expands, eventually splitting the pipe wide open and causing leaks. Ordinarily  these waste lines would never be dry but since the property has been neglected for so many years with some of the  buildings being completely vacant, there has been no water running through the waste lines. To date, we have  identified and fixed 73 of these pipe issues. 

In addition, the entire property was repainted from a dated pea green to a more contemporary neutral beige with  blue accents. Pool furniture and leasing office were updated to match the new look and unit finishes. 

The renovation plan cured all deferred maintenance including roofs, mold, landscaping, HVAC, concrete, and staircases; restored all down units, and marked a dramatic return to vibrancy for the property.

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Turnaround Plan 

A vital piece of our turnaround plan was to rebrand the asset and to successfully change the culture of both of the onsite staff and the tenant base. The property was renamed from the generic “Commons” to the more site-specific “Creekside South” to mark new ownership and management, which would operate substantially differently than  previous management. All-new signage, banners, and uniforms helped to spread the message of the rebranding and  change of ownership. In addition, relationships were rebuilt with local vendors who previously refused to do business  at the property due to safety problems and past owner’s failure to pay. 

Existing onsite staff were almost completely turned over. Veteran employees who had left for competing properties  were hired back and new, motivated employees brought on for both office and construction / maintenance. When implementing a turnaround and culture change, staff buy-in is crucial, since their positive attitude spearheads the  effort, along with the visible improvements to the property. 

Crime is perhaps the most concerning issue at historically mismanaged properties like The Commons. At takeover, crime and safety were severe problems: at night, the property was dark; the site was a no-go zone for Police, UPS, and FedEx. With Lone Star’s takeover, the ongoing presence of management and employees on-site contributed to a  feeling of a watchful eye. Most notably, physical installation of security cameras and extensive LED lighting  improvements formed the foundation for a proactive zero tolerance approach that minimized crime and dramatically reduced the number of calls to police. Additionally, we catalyzed higher tenant quality by halting renewals for problem tenants and tightening leasing protocols: we raised income requirements, eliminated zero dollar move-ins, and enforced lease violations. 

Building on the broad-based repairs to roofs, mold, landscaping, HVAC, concrete, staircases, and restoration of down  units, the operational turnaround plan stabilized occupancy to 93%, raised asking rents +22.9%, and brought life to  what had been a severely depressed property. 

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Asset Management / Performance 

Lone Star’s management also saw other operational improvements. Unexpected revenue upside came from renting units on a month-by-month basis in a “corporate”   rental format. This form of rental attracts high credit tenants who often prepay their entire term and pay a premium for the furnished, month-by-month experience. These tenants also tend to leave the unit in excellent condition. Rhino was implemented to supplement security deposits for riskier tenants, helping to raise occupancy, drive leasing, and improve collections. In addition, an “on-time payer’s club” with a monthly prize drawing was established to encourage and reward on-time payments and build  positive buzz and publicity.

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COVID-19 Performance and Collections 

The lockdowns and economic burdens linked to COVID 19 certainly complicated and challenged our already ambitious goals. In the best of times, Class C properties demand constant communication with tenants to ensure steady collections. With COVID, this became a full-time job. Additionally, long periods where evictions were impossible removed a major incentive for tenants to pay rent in the first place. One of the major advantages of owning and managing property in Texas is that evictions are quick and cheap: the total loss of this option was a major blow for Texas landlords. This resulted in higher physical occupancy but poorer collections. In response to this, we stayed active and maximized our ability to vacate units when possible; tighter tenant income and employment  screening ensured a more “COVID resistant” tenant base, with employment and capacity to pay rent less affected by continued shutdowns. 

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Add-on Acquisition: Forest Point 

While in contract to acquire The Commons, Lone Star was presented the opportunity to buy the adjacent 104-unit  multifamily property, Forest Point. Excited by the prospect of streamlining management over 300 total units with  reduced payroll, marketing, and other costs, we acquired Forest Point. Pricing of $4,625,000 ($44,471/unit) was  closer to typical market value (as opposed to the $26,403/unit paid for The Commons), but still allowed significant  upside. A forthcoming case study will detail further the Forest Point acquisition and the combined 300-unit business  plan of Creekside North and Creekside South (fka Forest Point and The Commons). 

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Refinance / Exit 

Lone Star successfully took out the bridge loan with a Fannie Mae floating rate facility at an initial interest rate of 2.50% (SOFR + 2.49%) and appraised value of $12,700,000 ($64,796 /unit) on June 11, 2021, 22 months after  acquisition. New loan proceeds of $7,550,000 (59.4% LTV) returned nearly all original investor capital – a huge success! Building on this, we anticipate further cash flow upside as rents are pushed on renovated units. 

The opportunity to continue forcing appreciation by further executing the business plan encouraged us to refinance  rather than sell; nevertheless, the $12.7M of proven property value per June 2021 lender appraisal shows substantial value creation and implies a 69.2% IRR were we to sell. 

The investment’s actual performance and execution to date has been a strong example of Lone Star’s ability to transact on compelling off-market opportunities, enter tough property situations, and competently execute complex and involved operational plans. Fitting our mantra of “Buy complexity, sell simplicity” – The Commons / Creekside  South was transformed from a half-empty no-go zone plagued by crime, weak operations and poor upkeep, to a clean, stabilized asset delivering quality of life to our residents and consistent cashflow to our investors.

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