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Case Study - Gateway Crossing

GATEWAY CROSSING STATS

• Location: Gateway District
• Purchased 2005: $1,410,000
• Units: 30
• Investment: $410,000
• Investors: 4
• Avg. Rate of Return:19.98%

Investor Profile
A mid-thirties microchip engineer and entrepreneur wanted to explore alternative methods of real estate investing which required less of his time than flipping single-family homes, with decreased risk and some tax benefits. Cash flow was important but not vital.

In January of 2004, he and his wife met with a Westland broker. After learning of the LLC structure and how Westland managed the investments, he pulled three of his business associates into the mix and together they agreed that they could comfortably invest $400,000. Westland was also interested in becoming part of the LLC and invested another $50,000.

Financing at the time was available with 75% loan-to-value ratios, so Westland began showing them properties for sale between $1,000,000 and $1,750,000.  What they ultimately purchased was a 30-unit complex in the Gateway district.

Opportunity
The most recent owner had been following the path of least resistance and expense: maintaining the interiors reasonably well but allowing the exterior of the building to deteriorate over time.

Westland foresaw that with improvement and better care of the exterior, the rents at this project could be substantially increased. They negotiated a price based on condition and closed the sale in August of 2005.

Execution
Westland submitted an application to the Oregon Department of Energy for a $77,000 weatherization loan for the property, now named “Gateway Crossing.” This loan was for installing all new windows and patio doors, as the old ones were single-paned, aluminum framed and very inefficient. The loan was approved and the installation completed.

Applications were also made for a cash rebate from Energy Trust of Oregon and tax credits from the State of Oregon. Based on the cost of the improvement, the tax credits equaled $23,675 over the course of 5 years. Rather than take them in five 1-year increments, the credits were sold for cash at a state-mandated discount. Per a pre-existing term of the loan, the cash rebate of $13,104 plus the proceeds from the tax credit sale of $20,097 were used to reduce the loan amount to $43,799 and monthly payment to $360 per month.

Result
Three months after the upgrades were completed:

1. Rent increases totaling $855 per month ($28.50 average increase per unit) had been implemented.
2. PGE reports that the average tenant was paying around $55/month less for their heating bill than before the weatherization; a net savings of about $26.50 per unit per month.
3. The investors’ net income increased $495 per month.
4. The building was estimated to have increased in value by $90,000 from these upgrades.

If the owners were to sell in 2009, they would be within a few percentage points of having doubled their initial investment of $450,000 in just over three and a half years.