Sweetwater Capital’s $8.2MM sale of River Hills Manor represented a 4.11% cap rate, set a new record for Chattanooga, and ranked #5 in the history of Tennessee.
THE PROPERTY
River Hills Manor, nestled right in the middle of a quiet Chattanooga neighborhood is a single building 2-story apartment community consisting of 128 units. Completed in 1980, it was purchased and operated by the original owners for 40 years.
THE CHALLENGE
The primary challenge faced by Sweetwater Capital’s (SWC) brokerage team revolved around the complex ownership structure of the property. Both original owners had gone through divorces and remarriages, and one of them had passed away just two years before SWC’s involvement in the sale. Consequently, ownership interests were divided, with the deceased owner’s share passing to her son, who had strained relations with his father. As a result, SWC found itself representing only one half of the ownership group, namely the father. This presented several specific challenges, including:
• Coordinating communication with the other faction of the ownership group
• Establishing trust among all involved parties (owners, legal representatives, advisors, etc.)
• Identifying a buyer open to acquiring a property with a fragmented ownership setup
• Facilitating property tours for potential buyers amidst the presence of multiple ownership entities
• Maneuvering through the legal intricacies of a “partition by sale” court process
THE GOAL
Secure the most favorable price for River Hills Manor, satisfying both factions of the ownership group, and ideally, attracting a buyer interested in retaining the existing property management team.
THE SOLUTION
To optimize the pricing strategy for River Hills Manor, it was essential to delve into not only the property’s features but also the owners’ dedication to long-standing tenants, given its decades-long history under mom-and-pop ownership. Examination of the rent roll uncovered tenants with lengthy residency, some spanning over 15 years, with rents remaining stagnant throughout. Evaluating the property solely based on these significantly below-market rents from the early 2000s would not serve the interests of the ownership group and would present a lucrative opportunity for potential buyers.
Our approach to valuation involved establishing two distinct values to delineate a range. Termed as “as-is” and “market-rents,” the former represented the current state of the property, while the latter projected its potential value once rents were adjusted to market rates. The as-is valuation stood at $7MM, while the market-rents valuation reached $9MM. Recognizing the impracticality for ownership to individually increase rents before sale, SWC presented prospective buyers with a partially adjusted pricing model. Consequently, we successfully negotiated the sale of a $7MM asset to a new buyer for $8.2MM,delighting our clients while providing ample room for the buyer to unlock additional value post-acquisition.
SUMMARY
Sweetwater Capital’s $8.2MM sale of River Hills Manor represented a 4.11% cap rate, set a new record for Chattanooga, and ranked #5 in the history of Tennessee.
