the real deal
Beware of Hazardous Conditions on the Road to the Sale
By Mark Bonn and Mirella Webb
The fourth quarter of 2007 saw a good number of transactions despite the unstable credit markets. San Francisco is undeniably one of the strongest investment markets in the country and over 20 sizable deals this past quarter proved this to be a fact. We continued to see the average price per unit stabilized at about $230,000 and the price per sq. ft. was around $330. The gross rent multipliers for these larger buildings are floating between 13 and 16, depending, of course, on the neighborhood. We should mention here that we did see three buildings purchased by San Francisco’s largest owner and these deals were all over 18 GRM and over $500 per sq. ft. The average prices have not declined from previous quarters, but there was an overall reduction of a minimal 1% from listing
to selling prices.
Let’s move on to our first extremely interesting transaction in the beginning of November at 335-341 Oak St. The seller of this 12-unit building was represented by Allison Chapleau and Laila Salma of Marcus and Millichap. Chapleau told us that this was one of the most difficult deals she’s ever done; if it wasn’t for the work of excellent co-broker Erno Veresh, she’s unsure this deal would have ever happened.
Where should we even start with the details of this transaction? During the escrow period there were a few “hiccups”: tenant eviction, a tenant dealing snakes out of his unit, fire in a unit, and an uncooperative management company. Now, let us elaborate on a few of these. One tenant was in the process of being evicted for nonpayment of rent. This tenant was also sweet enough to play with the electrical system; she spliced the wires so that her electricity was running off of the house meter. We don’t know how long the landlord paid for her electricity, but it certainly is amazing what tenants are willing to do to reduce their living costs in this city, so pay attention if your electric bill has a big jump.
There was also a lovely tenant who was dealing exotic snakes out of his unit, which made the buyer cringe and almost put an end to the deal. We’re unsure if the tenant is still in the unit, but he is certainly not dealing snakes anymore, at least not from his unit.
Another obstacle the brokers faced was that the management company of the building was unwilling to cooperate by providing the bills and other due diligence material. After they got through this hurdle came the biggest surprise. One of the tenants lit a candle in her unit and then fell asleep. You can guess what comes next: she caused major damage in her unit and in the process almost hurt herself. Unfortunately for the sellers, this mishap by the tenant cost them some extra money since they had to credit the buyers for this significant damage. Chapleau wanted me to add that Veresh deserves her “Favorite Broker of the Year for 2007” award for facilitating this deal.
In late November, 150 28th St. closed. We were able to interview Anthony Koutsos from Brown and Company, who represented the buyer in this transaction. This 12-unit property was constructed in 1965 with 12-car parking, balconies and an elevator. There was some minor upgrading to a few of the units, but most of them were of the original era and in average condition. During the inspections, the buyers discovered some dry rot on the shingles on the backside of the building. The buyer received a small credit. They also discovered water stains in one of the units caused by a previous leak, which, according to the seller, had been fixed so there were no active leaks.
The biggest issue at this building was that the seller negotiated a five-year laundry contract right before he put the building on the market, but the buyer did not want to have this service. As Koutsos suggested, owners should not put a five-year lease in place right before they know they will be putting a building on the market. It does not make the property more valuable. In fact, it devalues the property because buyers like to negotiate new contracts and feel like they’re in control of the property. They don’t like to be locked in to something for which they weren’t responsible.
One deal that we closed in November was 122-144 Tiffany Ave. in the Inner Mission. The sellers were represented by Cathy Kline-Saunders and David Antman of Zephyr Real Estate. This building has 12 units, but only sold for $1.5 million since the presence of many long-term tenants meant that the income was extremely low. The majority of the tenants have been there for so long that there were no leases for them, so the due-diligence process took a few extra weeks because we had to wait for all of the estoppels to come in.
Approximately half of the units were protected and most of the units were “tired.” One interesting detail about this property was that there was a resident manager at the building who outsmarted the previous ownership. Normally, a resident manager will pay about market rent, and the owner will reimburse the manager for duties around the building. Well, this manager negotiated a great deal for herself (probably back in the 1960s). She was only paying $78 per month for rent as of 2007 and did not get any reimbursements; this way her rent could only increase by about one dollar a year. All she had to do was sweep the stairs, take out the garbage and show units to new tenants. With so many long-term tenants, she hasn’t had to do that last task in years.
As we jump into 2008, we can still expect a good number of large deals, partially due to baby boomers retiring or getting tired of managing rent controlled apartment buildings. We do feel that it will be more difficult to meet owners’ expectations as far as pricing. A trend that we are seeing in commercial real estate in general is that a gap has opened between sellers clinging to the aggressive pricing metrics of last summer and buyers dealing with cautious lenders.
The opinions expressed in this article are those of the authors and do not necessarily reflect the viewpoint of SFAA or SF Apartment Magazine. Mark Bonn and Mirella Webb specialize in the marketing and sale of investment-grade properties, particularly apartments throughout the San Francisco Bay Area. They can be reached at 415-477-9207 or 415-477-9233. Copyright © 2008 by SF Apartment Magazine. All rights reserved.