Craig Stewart, Bill Anderson
ACRE Investment Real Estate Services
Royal Oaks, 650 Woodward Street, San Marcos
89,676 square feet and 122 units
Total consideration: $16.85 million
About the property:
Royal Oaks was a senior-only apartment community. There were no comparable sales of senior-only communities in San Diego for the previous three years. Pricing the property was made even more difficult, due to the above-average annual operating expenses incurred by the owner for such things as tenant holiday parties and generous employee salaries. To add to the existing expenses, the San Marcos school district hiked the annual bond payment to the property’s tax bill by $23,000 per year. The net result was annual expenses of almost 50 percent of gross revenue. The brokers had to show potential buyers that pro-forma expenses could be lowered to 40 percent of gross revenue through efficient management.
Closing the deal:
To add even more complexity to the sale was the seller’s existing debt — a “John Hancock loan” that had a large yield-maintenance penalty. The seller had assumed from reading the note that his pre-payment penalty was $100,000. Upon our further review the yield maintenance calculation was actually $1.3 million. The seller had already committed the majority of his net proceeds at close, so he insisted to make most of the YMP fee up by selling for a higher price or finding a buyer to assume the loan. The loan was not an attractive assumption: $10 million balance, due in December 2013, 6.19 percent interest and a 1 percent assumption fee.
During the escrow period, a bridge being built by the city impacted the property lines, a resident manager announced she was leaving at the close of escrow, and the lender demanded for minimum occupancy levels and income before the loan could be funded and escrow closed. The final snafu occurred on the day of closing, when the escrow company sent the loan pay-off proceeds to John Hancock one hour past the Friday wiring deadline. The result was an additional three days interest expense to the seller of $60,000 — which the seller wanted the brokers to pay out of their commissions. It was resolved with an appeal to waive the additional interest.