01 Nov $2.2M Instant Value-Add!
1450 Midvale Ave, Westwood, Los Angeles
Sourcing the Value-Add Opportunity
Through the CCIM Leadership network, Wolf Baschung, CCIM became aware of some West Side (Los Angeles) assets that might be available for sale. These were off market opportunities, which sometimes present value-add opportunities. After weeks of diligent follow up, a one liner on this property finally arrived: 35 units / Westwood / Price: $9.5M / NOI: $266,718 / Near UCLA.
Making the Offer
There was very little information to go by — no rent roll or expenses. Therefore, Wolf looked for comparable sales. However, the market was so tight in Westwood that no properties had traded in the previous 24 months. Nevertheless, the closest comparable sales put the price/sf at $450. Wolf Baschung had a client with a 1031 exchange who needed to place $5,000,000 of equity. Based on the square footage of the building, he suggested that the client make the offer at $9,000,000.
Negotiating the Deal
The seller immediately accepted the offer at $9,000,000. This was the first hint that a value-add opportunity was at hand. After all, the offer came in half a million dollars under the asking price, and the seller made no counter offer. The seller then made the rent roll and expenses available, and underwriting began in earnest. The following PDF shows simple underwriting done for the buyer:
1450 Midvale Underwriting
Careful underwriting and comp analysis showed that the property was undervalued. However, this is a rent controlled asset. While rents were low, we suspected some deferred maintenance. The buyer therefore carefully weighed the costs associated with achieving the value-add component. Property inspections followed.
Negotiation Part Two
The second part of the negotiation took place after the property inspection. The inspection revealed a fair amount of deferred maintenance. Importantly, both roof and elevator were beyond their useful lives. Because it is a three story building over a center courtyard, roof replacement is subject to OSHA regulations that are costly to overcome. Wolf Baschung then presented a significant credit request to the seller, based on the buyer’s due diligence findings. The strategy was to present the total scope of repairs required, at a cost of $923,535. Of that amount, $456,535 had to go immediately toward the safety and welfare of residents. Wolf therefore requested a $456,535 credit. You can see the cost breakdown and strategy by clicking on the following PDF:
1450 Midvale Work Required
Success!
The seller credit came in at $200,000, for a purchase price of $8,800,000. Buyers customarily expect half of the requested credit, so the buyer deemed this acceptable. In addition, the amount itself was significant. More importantly, Wolf Baschung had estimated that the property was at least 20% undervalued relative to market. A week later, that estimate was borne out when the buyer received an all cash $11,000,000 offer on the property. That yielded an instant $2,200,000 value-add to the acquisition.