Turning Around The Lofts: Inside a $29M Real Estate Transformation | Durable Value Ep 80
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Ryan Swehla: You know, for this episode, I thought it'd be good. We haven't in a while, uh, talked about actual specific case studies. And we invest on a daily basis, and there are, uh, all sorts of backgrounds and contexts to each investment that we make. And it'd be great to spend a little bit of time deep diving on one of those investments, and the one I'm thinking of in particular is The Lofts in Fresno. Uh, which is one that we purchased about a year ago.
Joe Muratore:
The Lofts at Stadium Square, formerly called The Victor.
Ryan Swehla: So we've got a rebranding. I like it. Well, uh, let, let's start by talking a little bit about, um, how we sourced and found the deal, um, because it, that's always a interesting process. Sure.
Joe Muratore: Well, it took about a year to buy the property.
Uh, yeah, I'd say it took a year from, uh, first hearing about it, about it to close. It came on the market. A, a syndication group out of Washington had owned it, and their model was to take traditional, uh, multifamily and turn it into student housing. And this property, 232 units, is across from, uh, Fresno State University, across from the stadium, so, uh, there's other student housing in the area.
But their, uh, execution was, uh, less, was not, uh, was not stellar. The great news is that they had put a significant amount of CapEx into the property. Um, they'd improved the common areas, the pool, the, um, each unit had washer/dryers already, which was excellent for the vintage. And so as we stepped into it, it, they had a $37 million appraisal, and that was their goal, get $37 million for it And, you know, they, they did sort of a soft sell, I think at 37, and then ended up coming to market at 35 million.
And just, it went into escrow and fell out. They weren't able to get the price that they wanted, and time elapsed, and time elapsed, and times, uh, time elapsed. And in the meantime, they were in a negative cash flow situation. This is all as I recall it. Mm-hmm. Uh, but the, the point is that, um, there was pressure on them to sell, and there was an opportunity for us to step in.
Ryan Swehla: Can we do a little sidebar there? Um- Sorry. How do, how do we keep track of properties like that? W- you know, we, uh... You mentioned that we first heard about it a year prior, and then we ultimately transact a year later.
Joe Muratore: Mm.
Ryan Swehla: How do we keep track of properties like that?
Joe Muratore: Mm. I mean, the first answer is that, uh, properties find us.
And pe- and people find us. We're a unique buyer, and we're not the buyer of first resort, usually. In that we're not willing to pay the highest price. We're not a 1031 exchange buyer. We're not a local family buyer. We're an in- we're an investment company. We're, uh, buying and selling all the time. So we're very attuned at, uh, what a great price is.
Which means we're not... We're, we're lovely people, but we're not the buyer of first resort. So while we do hear about properties often, uh, before they come to market or at the very beginning, uh, over time, they sort of keep calling our name. So our, our job is to, uh, be at the table and, uh, be familiar with a lot of properties and a lot of brokers.
We, we obviously have a, uh, an excellent, uh, pipeline tracker. We keep track of hundreds of properties. But to get the best deals, we don't get them by being especially proactive. Proactivity usually relates to higher pricing. And, uh, we wait for properties that come to us, and we're really polite, and we say, "Okay, we think we'd be willing to pay this."
And sellers say, "Whoa, whoa, whoa, whoa, whoa, whoa." And then we say, "Uh," you know, and, and over time, we might come up a little bit, but usually they have to come down a lot. So usually they have to work their way towards us. We usually work our way there a little bit. Um, but then we also end up doing due diligence.
Sometimes we find issues. And, uh, generally there's, things aren't, you know, perfect, and price moves back in our favor a little bit often as well. So...
Ryan Swehla: Let's talk about the, the due diligence process.
Joe Muratore: Sure. Uh, well, uh, we went through the rent roll and we found that, um- In a student housing situation, there was a lot of units that were half rented.
We learned that because it was a student housing project, there was a tremendous amount of rollover, uh, at, at one specific date prior to the school year. Uh, everyone was on a short-term lease, and everyone expired at the same time. Very scary. Uh, we found some roofing issues. We found some, uh, other repair needed issues, some siding issues, and, and all that came together for about a $700,000 discount, as I recall.
So, um- I take it back. We were in escrow at 30.5 million. Yeah. And then we came down to 29.7, so a, a big change. Uh, but then after buying it, we've turned... We put $2.7 million into the property. We rebranded it as The Lofts at Stadium Square. Uh, we took down all the, the student-oriented, you know, go, go Bulldogs signage.
Uh, we redid the pool. Uh, we redid 80 units. Um, we redid the facade. We redid the signage, the landscaping, and it, it looks incredible. I was there a few days ago, and it, it's, uh, you know, the, the best that this property could look. It's inviting. It feels sort of tropical- Mm-hmm ... like you're in Florida. Uh, the pool is incredible.
We were there with a customer, and he said, "Man, this looks like a resort pool." Yeah. And, and it does. And the- Yeah ... workout facilities are amazing, and there's a business center that can also work for studying, and it's, it's just excellent, so.
Ryan Swehla: Also, just to back up a little bit on due diligence, um, not only do we find out negative things during due diligence, which is more common, but because we are working with often dysfunctional sellers, sellers that don't know everything that they have, uh, we also uncover things during due diligence that end up working to our advantage as well.
And you, you mentioned the, all the leases being, uh, coordinated to the same expiration date. On the one hand, that's, uh, you know, we underwrote that, but that also ends up being a challenge because you're navigating through negative cash flow as you have potential, you know, potentially large vacancies, and then you're working back through.
But, uh, where we sit today is, uh, because we knew that going in and we knew that was part of our business plan now, it allowed us to execute the business plan much swifter than had it been a more traditional where you have kind of constant lease rollover and you're working a two-, three- or four-year plan to get the rents up to market- Mm-hmm
versus this very decisive moment that allowed us to execute the business plan a lot swifter.
Joe Muratore: One other thing that came up in, uh, due diligence was, uh, uh, was insurance. I mean, that's a big problem in, in all, in all parts of real estate right now. Yeah. But, um, with the amount of vacancy and the, the, the way the property was, we had to take it to surplus lines, which meant insurance was gonna be at $1,600 a door.
It was an absolute absolutely crazy amount.
Ryan Swehla: Mm-hmm.
Joe Muratore: Uh, we, uh, upon, uh, turning the units and stabilizing the property, we were able to put it with our master policy and cut that in half, but that was a great negotiating tool, uh, while we were in diligence.
Ryan Swehla: So let's talk a little bit about execution. Uh, one of the things that we're most proud of is the, uh, team that we have that is there to execute on these properties.
In this case, and in most cases, uh, a lot of times the, uh, staff that is at the property is part of the problem, not because they are incompetent or bad people, but because they are reflecting the ownership of the property. And so we have the ability to go in and hire and screen and interview and make sure that that team ultimately reflects Graceada Partners' culture, Graceada Partners' execution.
Yeah. And The Lofts is, uh, just a shining example of that with Allison and her team.
Joe Muratore: Yeah.
Ryan Swehla: Their ability to come in, and we knew going in that we were going to have large lease expirations come June 30th.
Joe Muratore: Mm-hmm.
Ryan Swehla: We knew that would mean a lot of unit turns, but it would also mean the opportunity to bring a lot of units to market, but only if we can attack it, that like nobody's business.
And, and I think the team there h- did a phenomenal
Joe Muratore: job with that. Occupancy went all the way down to 60%, and we're back up to 84% of, as of today, and closing in on- Soon 90% ... on 90%. So-
Ryan Swehla: Yeah ...
Joe Muratore: it's been an incredible lift. And they, I think they had nine move-ins last week.
Ryan Swehla: Well, and I remember h- seeing on the reports the number of units that they were turning every single week during that period of time.
Really phenomenal. And, and I think of, yeah, had we had to rely on a third-party property manager, that, that was part of the problem, is it was a third-party- Couldn't be done ... property manager. It just couldn't be done. Out of, you know, not... Even the property manager, the company wasn't based in Fresno. Right. So they had very little tie to the property.
Joe Muratore: This took a full court press. It took a company like ours. I, I think we were the only buyer, I think we're the only buyer that could do this.
Ryan Swehla: Yeah.
Joe Muratore: And, uh, now that we've done it, it, it's incredible, and it's stabilized, and we're bringing it back to the market as a diversified, traditional multifamily asset with families living there, students living there, you know, regular people living there, and not just the student population that wasn't gelling.
Ryan Swehla: Yeah. So what does that mean for a, a value creation standpoint?
Joe Muratore: We, we recently had a, an opinion of value from, uh, the most experienced broker in that market, and he recommended listing it at 43 million. So it's only been 12, 14 months, but, uh, bought it at 29.7, uh, going to market somewhere near 43 million. I mean, that makes, that makes it one of the best investments we've made.
So, uh, certainly we're standing in a good spot. The, the property cash flows really well now that it's re-leased. The rents are up. We've filled in the vacancy that was existing there. The property's in incredible shape. It's, it's beautiful. The pool area is amazing. I mean, it's very livable. So we're, we stand in a great spot of both cash flow and, uh, upside created.
Ryan Swehla: The move from the Victor to the lofts at Stadium Square.
Joe Muratore: Let's, let's do this about 100 more times.
In this episode of Durable Value, we dive deep into a real-world case study: the acquisition, turnaround, and rebranding of The Lofts at Stadium Square in Fresno. Join us as we break down the sourcing, negotiation, due diligence, and execution that turned a struggling student housing property into a thriving multifamily asset. Learn about the challenges, strategies, and lessons from one of our most successful investments to date.
Timestamps:
00:00 – Introduction
00:22 – The Lofts in Fresno: Background & Rebranding
00:47 – Sourcing the Deal & Initial Challenges
01:35 – Appraisal, Pricing, and Negotiation
02:01 – Negative Cash Flow & Seller Motivation
02:46 – Our Approach to Buying & Negotiating
03:12 – Due Diligence: Process & Findings
04:34 – Repairs, Discounts, and Final Purchase Price
05:00 – Rebranding and Property Upgrades
05:25 – Creating a Resort-Style Experience
05:44 – Due Diligence: Uncovering Value
06:28 – Insurance Hurdles & Solutions
07:03 – Execution: Building the Right Team
08:09 – Turning Around Occupancy & Performance
09:04 – The Importance of In-House Management
09:40 – Stabilizing and Repositioning the Asset
09:59 – Value Creation & Broker Opinion
10:27 – Results: Cash Flow, Upside, and Lessons Learned
10:56 – Closing Thoughts