When we talk about value-add, we are striving to create value by increasing the operational income of an asset. Alex Brackman recently shared the story of Camelback Flats (fka Sienna Springs) and today, I’m going to share another: West Grove Apartments.
In 2017, we had the opportunity to purchase West Grove Apartments, a 476-unit multifamily property located in Waukesha, Wisconsin (Milwaukee MSA), off-market. Prior to the purchase, the asset had been family-owned and managed for over 30 years. The property needed significant capital improvements to the interior units and common areas, and there was also the opportunity to enhance the day-to-day property management of the asset. Still, we were very intrigued at the opportunity to purchase a property of this size, boasting over 20 different floor plans, including 80 townhomes, and plenty of green space which surrounded its very own lake! Once we dug into the granular details and zoomed out to review the rest of submarket, we knew this was a great investment to pursue.
After thoroughly analyzing the asset by inspecting all units and common areas, we then reviewed the greater submarket and the competing properties and formulated our value-add plan.
The tenants of today demand a best-in-class amenity package, so first, we tackled the amenities:
- To maximize the use and enjoyment for the residents, we completely renovated the clubhouse, adding indoor basketball court, billiards and a shuffleboard, and a brand-new fitness center. This involved filling in a large pool to create more useable space, rearranging space to provide a more “open and airy” feel and refinishing the flooring, paint, and fixtures.
- We upgraded the outdoor spaces by adding a large private playground, soccer goals, a community garden area, and a fenced in dog park.
Next, we identified opportunities to reduce operational expenses of the property via energy efficiencies and utility upgrades:
- The asset was originally built between 1976 and 1991, the property was averaging over $240,000/year in water and sewer bills. Prior to our acquisition, no water savings projects had been done.
- One example of water savings was the installation of low-flow faucet aerators, showerheads, and toilets. This resulted in the properties water bills being reduced by over $60,000/year! At a 6% cap rate, this reduction yields about $1,000,000 in asset value.
Finally, we focused on interior renovation of apartment units to grow the rents to compete with market norms:
- Compared to the local submarket, asset rental prices were below the comps. We identified that by upgrading the flooring and appliances of the units and enhancing the common areas, we could increase occupancy and demand a higher rent structure.
- Before the end of Year 2 of ownership, we had already surpassed our targeted Year 5 rental rate goal
Due to the increased value and cash flows of the property, we were able to refinance West Grove Apartments. We decided on an interest-only, 10-year note, at a 3.05% fixed rate. Compared to the prior loan terms at 4.73%, there was substantial savings and opportunity for our investors. As a result of the refinance, we returned approximately 59% of original capital to our investment group, while still earmarking funds for continued renovations. Our current strategy on the asset is to continue to realize great cashflows while continuing improvements to further increase the value of the asset. We will always consider a sale if the right opportunity arises.
West Grove is a perfect example of why it’s important to continuously and proactively review what the market is doing. This offers you the ability to recognize opportunities when they are presented to you. Without understanding where market rents should be, recognizing the potential of energy savings, and maintaining common amenities as well as interior units for apartment communities in the area, West Grove Apartments would not be the great success it’s been.
Tim P. Wallen manages MLG’s Wisconsin multifamily property management company, Point Real Estate Management (PRM). He is a huge Milwaukee fan (Go Bucks!) and enjoys keeping up with the newest movies and tv shows.
