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Case Study - Erica Village

ERICA VILLAGE STATS:

• Location: Near Washington State University
• Purchased 1995: $ 2,640,000
• Units: 64
• Investment: $ 475,000
• Investors: 4
• Avg. Rate of Return: 22.7%

Property Profile
Erica Village was newer, well built, next to a public park and a greenbelt with trees and a creek. The location was in the path of progress i.e., about one mile south of where I-5 & I- 205 meet and close to the new Washington State University Campus. It had better than average sized units with washer/dryer hookups, a brick fireplace, forced air heat and air conditioning, carports, and a low interest 40 year assumable HUD mortgage that affected rent levels in only 13 units. The seller was very motivated for reasons other than the property, and sold his equity on contract, equal to 15% down payment including costs of sale, buyers purchase of security deposits, and maintenance reserves all spread over four years.

Opportunity
This was a venture with an unusually high leverage, and the understanding of the partners was that the cash flow would be modest for several years but had good personal tax benefits. The four partners were all people that had dependable sources to pay their part of the annual contract payment for the total down payment and the building was purchased in 1995 for $2,640,000 ($41,250 per unit).

Execution
In 2007 the property was refinanced based on a MAI appraisal of $4,280,000 ($66,875 per unit), with the owners taking substantial funds out on a tax deferred basis, plus increasing rents on the 13 subsidized units and eliminating some extra expenses associated with HUD mortgage paperwork and audits.

Result
The original partners agreed to stay in after having the opportunity to move to other ventures or just cash out. The property now has a healthy cash flow, albeit fewer tax benefits, and continued appreciation in value due to the quality of the location.