LOS ANGELES—Value-add investors are setting their sites on the Koreatown market. Lion Real Estate Group has purchased Sherman Apartments at a 1.34% cap rate from a private investor. The 60-unit apartment complex has a vacancy of 42%, and is on the list of non-ductile buildings. The buyer plans to completely gut and reposition the asset. 

“It's precisely because of the high vacancy that the property was a great acquisition,” Peter Strauss, a broker at Iconic Investments, tells GlobeSt.com. “The fact that the property was 42% vacant at the time of sale meant that Lion could go in and immediately implement a comprehensive rehabilitation and renovation program in a large block of units. This greatly speeds up their ability to reposition the property from one that's run down and unappealing to something that will attract young professionals who want to live in an active and urban location.” Strauss represented both the buyer and the seller in the transaction.

The property needs a significant amount of work, including upgrades to all major systems, from plumbing to electrical, as well as a new roof. Additionally, the property has pending litigation against it. Still, Strauss received loads of interest from a diverse range of buyers, and gave more than 20 property tours. In the end, he received eight offers from potential buyers. Lion Real Estate came to the table with an all-cash offer and a speedy closing of only 35 days; however, the top two other offers were all cash with a 30-45 day close as well. “The seller elected to work with Lion because they demonstrated not only an ability to execute and close, but also a strong ability to effectively navigate the construction process,” Strauss explains, adding that the buyer has had previous success renovating the Brownstone Lofts and Kingsley Towers. “The seller wanted to select a buyer with a track record of successfully tackling tough projects with vision.” The property traded hands for $5.2 million.

Lion Real Estate plans to perform a complete rehab, upgrading the property's major systems, changing the unit floor plans and adding in modern fixtures. Once complete, the property will have 50 studio and 10 one-bedroom apartments. The upgrades will help Lion to generate higher rents, as well. It will increase the studio rents from $700 to above $900 and the one-bedrooms rents from $825 to $1,250.

This sale really illustrates the high investor interest and demand in the Koreatown market, where the Vermont apartment complex traded hands earlier this year for a record-breaking $283 million. “This sale goes to further solidify Koreatown's recent reputation as the West Coast's urban lifestyle epicenter among millennials and young professionals,” says Strauss. “The transaction also goes to show that there are a lot of strong buyers scouring the market for deals of all kinds, and they are looking to get their hands dirty to make outsize returns. It further strengthens the belief that renters will choose properties in proximity to multiple public transportation options at the expense of parking. Finally, this sale is a milestone because it proves that buildings once thought obsolete can be made to appeal to LA's picky renters who are used to new and shiny.”