The property was built in 1990 in South Everett, near Everett Mall and Boeing Co.'s airplane assembly plant. The unit mix includes one-, two- and three-bedroom flats in 20 three-story buildings. Amenities include a recreation center with indoor and outdoor pools, full size indoor basketball and racquetball courts, locker rooms, a 24-hour weight-training center, and high-speed Internet. Other amenities include tot lots, nature trails and a protected duck pond. Occupancy was 96% at the time of sale, with rents reportedly in the $1.20 per sf per month range.
When JER and FSC acquired the property in July 2005, JER had to assume the seller's over-market Freddie Mac loan as part of the deal. In return, it got a discount on the price and planned to invest an additional $1.5 million in renovations, push rents a little, and absorb the pre-payment penalty with a new mortgage loan based on the property's increased value. In so doing, it hoped to raise the cap rate to 8% from 6.5%. Rents at the time were in the $0.80s per sf per month.
"They just kind of rode the market," says CBRE executive vice president Jon Hallgrimson, who had the disposition assignment. "They renovated some of units and got the lift in the rents so they could prove out what could be done there, but they didn't much beyond that. Heitman was looking to get back into the market after having recently sold a portfolio there."
Heitman should be able to push rents by going in and upgrading the finishes on the rest of the units, according to Hallgrimson. "We're seeing solid fundamentals, job growth and rent growth, which tend to go hand-in-hand," he says. "The only way we're getting hit is with what's going on in the capital markets; buyers procuring debt is a challenge that's putting pressure on cap rates."
In the Covington Farms deal, Heitman assumed the existing debt that JER had placed on the property. "The ability to assume attractive financing, even though the loan-to-value was low, helped facilitate the deal," Hallgrimson says.
Around the same time JER and FSC acquired Covington Farm they also acquired the 464-unit Glen Park at West Campus Apartment Homes in Federal Way, which lies about 15 miles south of Seattle. The duo re-traded that property in January at a spread similar to Covington. It bought the asset for $36.5 million ($78,644 per unit), completed a similar value-add program and sold it for $65.6 million ($141,379 per unit).
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