06/03/2009

Apartment Portfolio Seen as Under Pressure

A heavily leveraged mortgage on a 2,990-unit apartment portfolio has been transferred to special servicing, raising questions about whether the owner will be forced to sell or recapitalize the complexes.

The portfolio, which contains 20 properties in seven states, is controlled by veteran real estate operator Richard Nathan. His firm, National Commercial Ventures of Long Beach, Calif., assembled the Class-B buildings in 2006 through several acquisitions with the goal of upgrading them and raising rents.

Even though the properties at the time were appraised at only $218 million, Nathan's firm lined up $248 million of mortgage financing from Credit Suisse. The extra proceeds represented reserves aimed at funding $5,000 of improvements per unit and at covering loan payments while renovations disrupted rent cashflows.

Since then, the real estate downturn has thrown Nathan's game plan into jeopardy. The $179.8 million senior portion of the 5-year debt package, which Credit Suisse securitized, was transferred to special servicer Midland Loan Services on April 17, according to a servicer report that became available last week.

The report said that the fixed-rate loan, which is still up-to-date on its payments, was at risk "of imminent default." That terminology is sometimes used to mean the servicer thinks default is inevitable, though not necessarily imminent. No additional information was supplied. It's unclear whether National Commercial has nearly exhausted its loan reserves or how far along it is on its renovation plans.

In any event, the portfolio clearly is under pressure, given the 20%-plus drop in values in most markets nationwide. National Commercial is said to be talking with the holder or holders of its $68.2 million of mezzanine debt about how to proceed with the portfolio. The transfer of the senior loan to special servicing is raising speculation in the market that the owner might have to sell or recapitalize properties. A National Commercial executive declined to comment.

The interest-only debt package matures in November 2011. The senior mortgage has a 6.1% coupon. The mezzanine debt, which Credit Suisse evidently placed with one or more investors, was divided into three tranches. One has a fixed rate of 9.2%. The others have floating rates, pegged to Libor plus 6.5 percentage points and Libor plus 9 points.

The two largest properties in the portfolio are the 434-unit Oak Hollow in Sacramento and the 380-unit Wood Chase Apartments in Norcross, Ga. There are also two Colorado properties (the 220-unit Bluffs at Castle Rock in Castle Rock and the 208-unit Centerpoint East in Aurora), three in Austin, Texas (the 344-unit Wildwood Apartments, the 160-unit Club Creek 2 and the 156-unit Village at Riverside), two in North Charleston, S.C. (the 214-unit Pepperhill and the 52-unit Palmetto), one in Orlando (200-unit Palm Harbor) and one in North Highlands, Calif. (the 185-unit Sierra Village Apartments). The remaining nine are in Virginia: eight (ranging from 12 to 150 units) are in Virginia Beach, and one, with 36 units, is in Norfolk.

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