Successful condo conversion

For TAR’s Commercial Transaction of the Year, a local company goes up against the "big guys" and comes out on top.

Stephen Fithian first converted a rental community into individually owned condominium units in 2001. Based on the success of that conversion, many of his clients sought similar investment opportunities. Finding properties suitable for such a conversion proved to be a formidable challenge, though. Even when such a property was available, competition for it was intense. In 2002, Fithian, who has both a brokerage firm, Visions Realty & Investments, and a management company, Frontline Property Management, was able to identify and ultimately close on a gem.

A property that could be too good

Last April, Fithian received a call from a commercial lender who knew Fithian was looking for an upscale multifamily property suitable for conversion. Fithian requested a package for a 168-unit Class A property in North Arlington called Post Ascension Point. Post Properties, a national real estate investment trust (REIT), owned the property and had listed it for sale with the Apartment Group of Dallas. Phase I of the property included 92 units built in 1985 as condominiums. Individuals owned 10 of these units, and Post owned the remaining 82. In 1995, Phase II, which included 86 units, was built. Post controlled 100% of Phase II.

Fithian had mixed feelings. "I found a great property, but I couldn’t imagine being able to compete for it," Fithian says. Typically in that market, national companies and real estate investment trusts snapped up properties of that type. Regardless, Fithian enthusiastically pursued a strategy to acquire the property.

After reviewing the marketing package, Fithian spent three weeks performing initial due diligence and analyzing the potential for reselling the units as individual condos. He also prepared spreadsheets analyzing the acquisitions, financing, operation as a rental community, and eventual sale of the units. Fithian’s background as a CPA, combined with courses he took to earn his CCIM, stood him in good stead as he generated some fairly complex spreadsheets and projections. His analysis revealed the need to raise $3,300,000 in equity. While completing due diligence, Fithian was in constant contact with several key investors to gauge their interest in participating in the deal.

The acquisition plan began taking shape as the May 24 deadline for offers neared. Three investors–as well as Fithian himself–had made equity commitments, giving Fithian the confidence that he could syndicate a group and raise the remaining funds necessary to complete the sale. Because the listing agent had set forth very aggressive deadlines in the letter of intent, Fithian contacted legal and accounting firms with expertise in private placements to make sure that his group could comply with the deadlines.

Playing up his strengths

Fithian knew that the competition for the property would include large, national multifamily-property buyers. He also knew, however, that his group had its own advantages. Visions Realty and Frontline Property Management were local companies with a strong entrepreneurial background; he had a proven track record in selling individual units from a rental community; and his group was willing to pay a premium. Fithian knew he had to prove that he could and would close the deal, because the competition certainly could prove their financial strength.

To make his case, Fithian went beyond the required documentation for the letter of intent. He also submitted a detailed package including résumés and financial statements for the principals involved as well as references from previous transactions. In addition, the lender Fithian’s group was working with personally called the listing agent to verify the group’s ability to obtain the necessary financing for the transaction.

Fithian met with the listing agent to personally present his offer and to explain the supporting documentation. He even presented a copy of the assumptions in his analysis to prove the soundness of items like the costs to complete deferred maintenance he anticipated finding during the inspection period. "Meeting in person certainly helped," Fithian says. "I had not dealt with these guys before, and in the two or three trips I made over there, I developed a rapport with them." One of the agents had even been a CPA.

There were 16 offers made on the property. Seven were selected to submit a "best and final offer," with less than a week to formulate it.

"Since the competition was financially stout, we tripled our earnest money and offered to commence the feasibility period immediately upon being awarded the deal, even before negotiating the contract," says Fithian. "We also agreed to waive our financing contingency after a very short period of time." Fithian met with the legal and accounting teams to ensure that they could comply with the new, more-stringent
deadlines.

Narrowing the field ... again

After the "best and final" submissions, Post narrowed the field to Fithian’s group and two other potential buyers. "Fortunately, I have a very, very good team," Fithian says, referring not only to those in his company but also the title company and lenders and investors who have participated in several transactions with him. "We were able to put together a great package with great references, where the listing agents could pick up the phone and call. Which they did."

The next round consisted of phone interviews. The teleconference lasted more than an hour. "It was the first time I talked directly to a representative from Post," Fithian says. "I tried to project our strong points." Topics discussed included Fithian’s previous experience with similar transactions, other deals that his group had closed, properties for which they had contracted but not closed, and other issues that could prevent them from closing on the transaction. After alleviating Post’s concerns about the partnership’s ability to close, Post agreed to contract with Fithian’s group.

"The next four weeks were probably the busiest and most stressful time of my career," Fithian says. There was much to be done. Fithian put together a team to complete the due diligence on the property. He spent many hours with the legal firm that drafted the private placement memorandum. He considered for a significant time how to hold the property, ultimately deciding upon a partnership structure with a limited liability company as general partner. The other major task was raising the remaining equity for the deal before the earnest money went "firm."

In the middle of all this, Fithian went on a previously scheduled family vacation to Southern California. "I spent hours on the phone at Disneyland," he recalls.

Overcoming several obstacles

There were many hurdles to overcome, including an encroachment of one of the buildings over a lot line, and convincing all 10 individual condo owners to agree to include Phase II in the homeowners association. Nine thought the incentives Fithian offered were fantastic, but the tenth owner wouldn’t budge. "We had to form a totally separate HOA for Phase II," says Fithian. He then performed research to ensure that the ultimate buyers could obtain satisfactory financing on units in a "fractured" condominium project.

Fithian cleared all those hurdles. The SEC received the private placement documentation. Fithian raised the needed funds, completed the due diligence, and identified deferred maintenance that was within the budgeted estimates. Finally, the group obtained approval for a $7,750,000 loan prior to the expiration of the financing contingency.

The transaction closed on August 15. In just 60 days, Fithian had negotiated the contract, performed the due diligence, prepared a private placement memorandum, raised more than $3 million in capital, obtained a loan, and closed a $10 million deal. Fithian’s legal firm revealed they had never completed a private placement in such a short time. "Most importantly," says Fithian, "We have 18 satisfied clients who are now limited partners in the project."

home   current issue    top 10    resources 

discussions   contact us   search

Buyers & sellers, visit www.texasrealestate.com.
REALTORS®, visit www.texasrealtors.com.