Not every new apartment project in Irvine’s rapidly-growing base of rental communities is a money-winner for its development team.
That’s the indication from a just-sold 280-unit midrise complex that opened earlier this year, a few miles from John Wayne Airport, in the center of an area now seeing an abundance of rental projects.
Regulatory filings indicate the project, called Fusion, could cost its Atlanta-based development group upwards of $7 million, a loss that equates to about $25,000 per unit.
Don’t chalk up the losses to a glut of rental product that have gone up in the Irvine Business Complex the past few years—several thousand apartments have been built in the 2,700-acre IBC the past five years. In fact, pricing in the area remains near record levels, based on the sales price of Fusion.
Rather, construction delays and a complex regulatory environment in the area added time and related costs to the project, according to the developer.
“We delivered what we promised—I think [from that perspective] it was a successful deal,” said Jeff Warshaw, principal with 360 Residential, which built Fusion. “Did we make a profit? No.”
The five-story project on Murphy Avenue and a block from Jamboree Road was sold by an affiliate of 360 Residential last month for $118.5 million, or $423,000 per unit, property records indicated.
Fort Worth, Texas-based Olympus Property bought the complex. It’s the privately held company’s first asset in Orange County, according to the company’s website.
On a per-unit pricing basis, Fusion is the most expensive apartment sale for a complex larger than 50 units in Irvine in over a year, and is the city’s priciest apartment deal overall for the year, according to data from real estate market tracker CoStar Group Inc.
It also ranks third among all larger-sized rental sales in OC this year on a per-unit price basis, and fourth in OC by overall price.
Rain, Regulation
The lofty price for Fusion wasn’t enough to make the deal a winner for its developer, which initially projected a late 2016 opening.
“We first got involved in it around 2012 or 2013,” said Warshaw, who said the company was attracted to the city’s demographics and recently-enacted measures designed to spur residential development in the IBC. Fusion is the privately held developer’s first apartment project in Irvine.
The developer worked with Torrance-based architect Withee Malcomb on the project, whose design “blends Feng Shui design with contemporary condo-quality interiors.” The architect said the project is geared towards young professionals.
“Numerous” construction problems affected the timeline of the project, Warshaw said.
In particular, the heavy rains from two seasons ago set back work by about four months, and required replacement of some materials.
The developer was also impacted by a lengthy back-and-forth process with the city over inspection-related issues, which added more time to the process, he said.
“It’s a function of developing in Southern California, and Irvine,” Warshaw said.
Added construction costs totaled nearly $10 million.
Fusion ultimately opened a few months ago, about 18 months later than initially expected. It was put up for sale prior to the complex being leased up; it was about 10% occupied at the time of sale, Warshaw said.
Olympus said it bought the project under an opportunity fund it runs that is “composed of uniquely positioned assets offering strategic upside for our firm and our partners.”
Shortfall
The project’s main lender, Atlanta-based Preferred Apartment Communities Inc. (NYSE: APTS), disclosed in regulatory filings that the $118.5 million offer from Olympus was the highest bid for the project.
However, that price was “approximately $12 million less than the aggregate debt balance on the property,” Preferred said in those filings.
Preferred said it restructured the loan tied to the project—which initially carried an interest rate of 16%, later revised to 8.5%— to “ease the burden of increased construction costs and to protect the company’s investment in the loan.”
The lender said it still made money on its end of the deal.
“To be clear, over the term of this loan investment, not only … will the principal of this loan be repaid in full, but we will also receive over $20.1 million in interest yielding a 12.9% IRR on the investment—not a bad investment by any measure,” Chief Executive Daniel DuPree told analysts last month.
After the loan restructuring, there was still a remaining shortfall of $7.4 million, which “is the responsibility of the developer,” Preferred disclosed in its quarterly report last month.
How much of that shortfall will ultimately come out of the pockets of the developer wasn’t disclosed. Preferred and 360 Residential are longtime partners and are involved in other projects together.
“We worked it out with them,” Warshaw said.
Preferred said in its latest quarterly earnings report that the shortfall would largely be funded “by draws upon an existing line of credit,” whose collateral includes other apartments that the developer is building.
“It was a tough development,” said Warshaw, who indicated his company isn’t looking in California for additional projects right now. Other developments it has underway include apartment projects in Florida and Georgia, according to its website.
Busy Block
Fusion’s on a 3.6-acre site that’s within a block of several other rental complexes, including the 381-unit Residences on Jamboree project that opened about a year ago, and the Kelvin Apartments, a 194-unit complex that sold three years ago for about $414,000 per unit, slightly below the pricing paid by Olympus.
Fusion stands out from other midrise complexes in large part by its rooftop, which features one of the area’s first full-amenity decks.
The top floor holds a rooftop saltwater pool, spa, cabanas, and a state-of-the-art fitness center, according to Olympus.
Common areas at Fusion also include “a Zen garden and koi pond; fire features and waterfalls; children’s play areas, skyline views; a community kitchen with commercial grade appliances and temperature controlled wine refrigerator,” the buyers noted.
“Olympus got a great property,” Warshaw said.
Monthly rents at the complex are about $2,100 for a one-bedroom unit, and two-bedroom units start around $2,800.
“This is a once in a generation opportunity to purchase one of the best properties in Irvine,” said Chase Bennett, Olympus Property’s director of acquisitions, in a statement at the time of the sale. He’s based out of the company’s Newport Beach office.
