TAMPA-On May 10th, Behringer Harvard, a sponsor of non-traded publicly-registered REITs, took possession of the Palms of Monterrey, a 408-unit apartment community in Ft. Myers by foreclosing on the senior debt, which it had purchased last fall. The property is about 100 miles south of Tampa.

Last October, Behringer Harvard Opportunity REIT II, Inc. purchased, through a joint venture with a separate partnership, Tampa-based DeBartolo Development and Tyler Christian Properties, a promissory note secured by the first lien mortgage on the property for $25.4 million, plus closing costs, from the FDIC, which acted as receiver for Chicago-based Corus Bank, N. A.

The original Corus loan was for $69 million. The lender was taken over by the FDIC last September.

From the beginning, says Jason Mattox, chief administrative officer for Dallas-based Behringer Harvard, a 90% partner in the deal, “we wanted to gain control of the Palms of Monterrey.” It was always considered an opportunistic play, he says. There was no expectation of a long-term hold. The Palms of Monterrey was considered a risky deal, because of the need for a foreclosure, but the reward was great, says Mattox.

The Palms of Monterrey was built in 2001 as an apartment complex, but a condominium converter, known as 15250 Sonoma Drive, LLC, purchased the property in 2006. “It took many months to vacate the complex so the owner could sell the units,” says John Stone, managing director of multi-family services at Colliers Arnold in Tampa, who represented Christian Tyler Properties and DeBartolo. The two were the original partners who wanted to acquire the Palms of Monterrey. Behringer Harvard was brought in later, because they needed more money to do the deal.

By the time the vacating process was finished at the Palms of Monterrey, says Stone, the condominium market had turned sour, but the property was now 75% vacant and the owner had a huge mortgage. At the same time, the rental market in Ft. Myers had gone soft, he says. Although the property is 98% rented today, says Stone, it took three years to get to that point.

“The physical occupancy has nothing to do with the economic occupancy,” says Stone. Not only was there a period when the property was almost empty, the buyer had paid a high price for it, because he had planned to convert the complex, much more than if he had planned to keep it as a rental, says Stone. That is why foreclosure seemed inevitable, he says. The property wasn’t worth the amount of the mortgage, says Stone.