Opportunity

DRV leveraged its relationship with the project developer to purchase the property, a 108-unit/324-bed student housing project on approximately 8.7 acres and two blocks from North Carolina A&T State University, in an off-market transaction. The property possessed a distinct competitive advantage due to its location, amenity package and physical characteristics relative to competing properties in the market. In addition, demand for housing exceeded supply in the market and A&T’s enrollment was projected to grow at a healthy rate with limited new housing under construction or in planning. Despite these positive factors, the property was suffering from low occupancy. DRV identified an opportunity to apply its student housing knowledge to increase income.

Transaction

DRV purchased the property for $9,800,000 (below appraised value). DRV assumed the in-place life company first-trust mortgage and supplemented the capital stack with a new second-trust mortgage from a private pension fund. Mezzanine debt and equity were provided by a syndicate of private investors.

Strategy

The operating strategy was to leverage the property’s competitive advantages to increase full-year occupancy and reduce above-market operating expenses. Implementation included the creation of a formal marketing and retention program, restructuring of lease terms, renegotiating of service contracts and adherence to tight management controls.

Results

Within one year, the property achieved 100% occupancy (all 12-month leases) with increased rents, no leasing concessions and a 12% reduction in controllable operating expenses. After maintaining this level of operations for an additional two years, DRV retired all the outstanding debt and returned 100% of investor equity through a new 10-year interest-only conduit mortgage. The equity investors now earn an infinite cash-on-cash return.