Monterey Townhouse Apartments

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Asset Management, Development Planning, and Disposition as Apartment with Condo Map Entitlement

Grew Net Operating Income of an aging 90-unit apartment complex in the small, affluent city of Monterey, CA, with the longterm goal of attaining the maximum possible disposition yield. Over the course of 5 years, ORION Commercial Partners acted as the development advisor, developing plans to renovate a 1971 workforce housing apartment complex into a new condominium complex with a renovation budget exceeding $15 million. ORION’s strategy on behalf of the client was to tap a majority of the entitlement profit without engaging in the risk of development and the condo sales market.


Macroeconomic: The subprime market collapse created a need to change courses quickly to maintain the investor’s yield expectations.

Size: The Monterey market is too small and removed from the Bay Area to attract institutional investor interest, but the 90-unit size was out of reach for most private investors, so there was a very narrow band of investors who found the project palatable.

Age: The project itself required creative planning to reutilize existing infrastructure, capitalize on existing build out, and deliver a like-new product to meet high market expectations.

Local Politics: The project catered to lower income demographics, there was neighborhood resistance to change and skepticism about parking impacts, as well as onerous municipal regulations.

The difficulty and cost of transforming the property to serve a new purpose made most parties gun shy about purchasing or developing the property.

Assessing Development Potential

ORION initially assessed the capital markets to ascertain if the asset could experience a high value sale as apartment investment only relative to condominium conversion. ORION screened, interviewed, selected and assembled a team of experts to ascertain development potential, local housing market conditions, permitting and construction challenges. These team members included:

  • Local investment brokerage
  • Local housing market sales team
  • Banking consultants for construction
  • Loan brokerage for new financing inputs
  • Entitlement manager
  • Contractors and subcontractors
  • Architect
  • Land use and contract attorneys
  • Marketing and communications professionals
  • Insurance Specialists
  • Defeasance coordinators
  • Tax specialist

After spending several months developing a conversion plan it was determined that there was $3-$5 mil of additional value in entitling the project for conversion, and approximately $5-$9 mil of condominium sale profits above a $12 mil acquisition basis and $13 mil of conversion costs. Ownership decided to not engage in the condominium conversion due to concerns about the level of market, construction and lawsuit risk associated with a project of this age in the state of California. We selected entitlement, then sell as the strategy to capture a reasonable amount of upside without undue level of risk.

Development Planning

ORION then embarked on national campaign for small, wealthy community developers. We selected the developer who showed greatest qualifications and access to debt and development capital and contracted with them to become the purchaser and converter. We created a regular nonrefundable deposit program requiring immediate sharing of all development documents. The developer was unable to close due to the onset of the Great Recession in 2008. However, the client exited from the relationship with full conversion plans for sensible workforce housing and a condo map (full entitlement), another adjacent valuable property to augment parking to meet conversion requirements which ORION helped the client acquire, Due Diligence reports, and the $800,000 of accumulated Deposit.

Asset Management

ORION then advised the client to hold the property for several years for stable cash flow during the turbulent economy and stock market of 2008-2010. During this period ORION acted as asset manager in the performance of many duties, including:

  • Apartment renovation and maintenance.
  • Resolution of several encroachments on neighboring land (belong to another City).
  • Curing of client’s inadvertent change in title and resolution of technical default with conduit lender, and advised on new TIC ownership structure to transpire just prior to closing for partners to effect separate 1031 tax deferred exchanges.
  • Securing new financing with flexible prepayment and low rates through Freddie Mac.

After several years of holding for cash flow and maintaining 97% occupancy, ORION advised FGP to market the property statewide and nationally to targeted groups of high net worth and sponsored funds active just below the institutional radar. After negotiating to a favorable selling price of $11.75 mil (5.2% capitalization rate), ORION assisted a Los Angeles area syndication in studying and closing on the asset at that price. Additionally, ORION assisted 2 of the 4 FGP partners in securing 1031 upleg replacement properties at 8.0% cap rates and higher for fully stabilized, institutional grade replacement properties (the other two parties elected to pay capital gains tax and invest outside of real estate).