Investment Info:
Large multi-family (5+ units) commercial investment investment.
Purchase price: $1,345,000
Cash invested: $500,000
Sale price: $1,825,000
Case Study: 3142 Fairfield Avenue
This case study delves into the transformation of an 8-unit mixed-use property, a blend of residential and retail spaces, located in the vibrant Black Rock neighborhood of Bridgeport, Connecticut. Constructed in 1917 and recently renovated in 2023, this 8,500 square foot building stands on a 0.18-acre site and features a variety of living spaces including four two-bedroom apartments, one three-bedroom apartment, a spacious one-bedroom unit, and two commercial retail units. The property also includes 6 off-street parking spaces, adding convenience for residents and visitors alike.
Background
Redwood Capital Advisors was able to identify and purchase the building off-market from a ‘mom-and-pop’ seller for $1.34M. Utilizing their favorable financing relationships to then secure a ~$1M loan from a local credit union. They subsequently raised ~$500K in equity to successfully on the transaction.
The out-of-state seller utilized a typical property management company which resulted in bloated expenses and a rent roll below market levels. Quickly after purchasing the building, RCA implemented a strategic CapEx program that increased both Revenue and NOI. The property was contracted for sale 8 months after purchase at $1.825M, reflecting around a 36% capital appreciation. This sale was finalized in October 2023 – 12.5 months after the acquisition. It strategically aligned with long-term capital gains, resulting in over 18% returns for Limited Partners over a 12-month period.
The sale now holds the Bridgeport, CT record for the highest price per unit in a sale at $228,125 per unit. The previous record in Bridgeport was held by 333 State St, a 67-unit mixed-use property, which sold for $202,985 per unit in 2021.
Business Plan
The building, acquired by the current owners 15 years ago, presented a significant operational upside due to their lack of experience. With an established presence in the Fairfield County market, and a reliable team of a proven general contractor, property manager, and leasing team, this property seamlessly integrated into RCA’s portfolio. At acquisition, the in-pace apartment rents were ~30% below the market rate, and the expense ratio was at least 10% higher than it should have been.
The original business plan was to implement the strategic CapEx program slowly over a 3-year period and then market the building for sale. For this reason, they opted for financing through a local credit union to avoid prepayment penalties.
Prior to purchasing the building, cash-for-key agreements with 4/6 apartment tenants to move out post-close were reached. At that time, RCA’s general contractor was given access to examine the units to pre-order all the materials needed for the 4 apartment renovations. Renovations, starting two days post-closure, included overhauls of kitchens, bathrooms, flooring, electrical, and plumbing systems, and the addition of in-unit washer-dryers, with an average expenditure of $33K per unit. This resulted in a 27% ROIC. Minor updates to common areas and the exterior were also made to enhance curb appeal and leasing prospects.
Concurrently, rents for the remaining two legacy apartment tenants were raised by 10-20% upon lease renewal. The 2 retail spaces, already close to market rent, were under long-term leases with substantial increases.
RCA prepared 3D floor plans and interior renderings for early marketing of the units. It still took about 4 months to achieve 100% occupancy due to the leasing period beginning in December, a seasonally slow period. The process included one eviction, a procedure RCA is well versed in, taking roughly 2.5 months in Connecticut.
The value-add process resulted in a ~60% increase in NOI from ~$74K at purchase to ~$118K on a run-rate basis after 7 months. Despite an initial plan for a longer hold, RCA has already achieved the projected NOI growth that was supposed to take 3 years. Therefore, they decided to test the market and listed the building for sale at the originally projected sale price of $1.875M.
Less than a week later, despite record-high interest rates, they received an all-cash $1.825M offer from a 1031 buyer and immediately accepted. The sale was strategically delayed for 4 months post-PSA execution to qualify for long-term capital gains, resulting in an LP IRR of over 18% for the 12-month period.
The sale now holds the Bridgeport record for the highest price per unit at $228,125, Surpassing the previous Bridgeport sales record of $202,985 per unit set by 333 State St, a 67-unit mixed-use property in Downtown Bridgeport in 2021.
https://westfaironline.com/real-estate/bridgeport-mixed-use-property-breaks-record-for-price-per-unit-sale/
What made you interested in investing in this type of deal?
• Purchased directly from a mom-and-pop operator off-market
• Secured $1M credit union loan and raised $500K equity to close
• Existing owner had inflated expenses and below market rents
• In-place rents approximately 30% under market at purchase
• Expense ratio at least 10% above the norm
How did you find this deal and how did you negotiate it?
A long-term colleague and active local broker brought the pocket listing.
How did you finance this deal?
Loan from a Local Credit Union, Nutmeg State FCU.
How did you add value to the deal?
• 4 apartments renovated just 8 weeks post-closing after buying out existing leases
• $33K per unit renovation, achieving 27% ROI
• Legacy tenant rents increased 10-20%
• $148K capital investment generated 50-60% rental increases
• Professionalized property management added
What was the outcome?
• NOI increased 60% from $74K at purchase to $118K stabilized after ~7 mos.
• 3-year business plan goals achieved in under 12 months
• Listed for sale at 2026 projected price of $1.875M
• Accepted $1.825M cash offer from 1031 exchange buyer
• Closed sale in Oct. 2023 to secure long-term capital gains
• New Sales Record Set: $228K per unit sale price, the highest ever in Bridgeport CT
https://westfaironline.com/real-estate/bridgeport-mixed-use-property-breaks-record-for-price-per-unit-sale/
Lessons learned? Challenges?
Evicting two problematic tenants was a challenging process, even though we managed to remove them quickly.
Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?
Matt Cawley from National Mulitfamily.
