Discovering value through renovation.
Few people recognized the potential of a physically decaying, 38-percent-vacant apartment complex as they drove along Glenwood Avenue in Joliet, Illinois. Our company saw the potentially valuable asset under the shabby facade of the 25-year-old Glenwood Green Apartments.
The property - Before
When Eagle Properties, Inc. of Fox Lake, Illinois, bought Glenwood Green Apartments in May 1989, the 261-unit complex was a physical and fiscal nightmare. Wood trim was rotting. Paint peeled from each of the 11 buildings. The asphalt parking lot was reduced to a combination of potholes and gravel, and the swimming pool was unusable because of cracks. Ill-fitting exterior doors to common areas and a sparse, flowerless lawn conveyed a continuous negative impression of the property.
Interior deferred maintenance had left 96 apartments uninhabitable - stripped of carpeting and cannibalized of appliances. Even those apartments where repairs had been attempted were in unmarketable condition. New air conditioning units had been improperly installed, leaving a two-inch gap stuffed only with foam rubber. Shower surrounds had been installed over failing tile, and subflooring was rotten under new vinyl.
Poor management and early extraction of cash had also severely damaged the property's marketability. Tenants included prostitutes and suspected drug dealers. The rental rates were between $50 to $150 lower than other apartments in the area, and the overall cash flow was negative.
Despite its obvious surface problems, demographic data revealed the property's tremendous potential for rehabilitation. The Joliet/Will County area had undergone significant growth in the last decade. Between 1980 and 1989, total households in the county had risen by 8.1 percent. Median income had grown almost 40 percent during this period. The Joliet/Will County Center for Economic Development had used a combination of tax incentives and financial benefits to attract 6,000 new jobs into the area.
Actions by governmental entities also enhanced the rental market in the county. Although the town had grown, an unwritten moratorium had prevented the construction of any new multi-family housing in the city for the previous five years. As a result, vacancy rates for renovated comparables in the area were approximately 5 percent. After assessing the rising demand and the constant supply, the company concluded that it could increase both occupancy and rents at Glenwood Green.
A second major factor favoring the property was its location. Glenwood Green is surrounded by a stable, well-maintained neighborhood of single-family homes. Indeed, the property was the least desirable in the neighborhood. The property is served by one shopping center and two community centers, all located within one mile.
Its 681 feet of frontage on a major four-lane highway gave the property easy access and provided a good leasing window. The unit mix of the property Figure 1) was well suited to the demographic growth of the area. All of these factors indicated that with renovation and careful management, the property possessed real potential.
FIGURE 1 Unit Types and Sizes Unit Type Quantity Square Footage Two-bedroom townhouses 4 1,000 Three-bedroom townhouses 3 1,160 Studio apartments 26 375 One-bedroom apartments 52 525 83 620 25 640 Two-bedroom apartments 47 775 21 805
The plan - Part 1
The sale of the property was closed in May 1989. Figure 2 summarizes the financial aspects of the acquisition. A key figure in this summary is the $167,550 remaining after closing. This amount served as the seed money for the initial phases of property renovation.
[TABULAR DATA OMITTED]
During the first few months following acquisition, the company corrected some of the most visible defects of the property and enhanced the curb appeal with design improvements. Resurfacing the parking lot, fencing the property, and planting flowering shrubs were among the first improvements.
To add both a sense of drama and security, the company used brick pillars, wrought-iron gates, and new signage to frame the entrance. To draw greater attention to the property, the company obtained city permission to erect the site monument on an island dividing the city street at the entrance to the property. The city was also persuaded to change the name of the street, from Glenwood Green Drive to White Birch Lane, disassociating the property from its former negative image. The physical enhancements produced positive reactions from potential and current tenants and neighbors.
The second aspect of early renovation occurred behind the scenes. Management was intensified. Rents on units were immediately raised, with one-bedrooms increasing from $315 to $340 per month. Several of the most undesirable tenants were evicted, and new property rules were promulgated and strictly enforced.
Concurrently, the service was heightened. Maintenance requests were answered promptly, and visible repairs were made on the worst exterior problems. When tenants, testing the new management, knocked down the recently installed fence, it was replaced immediately. After several such instances, vandalism dropped off sharply. The physical and the social atmosphere of the apartments began to improve.
The plan - Part 2
At the same time that these initial repairs were being made, the company was negotiating to obtain financing for more extensive renovation. Initially, the company requested a $1.7-million construction loan to fund a one-year renovation schedule.
However, beginnings of the current credit crunch made financing difficult to obtain. Finally, in April 1990, a $4.9-million construction loan was obtained. The loan provided $1.7 million for renovation and allowed the company to retire its outstanding first and second mortgages.
Although limited funding slowed the renovation efforts during this period, ongoing management continued to improve the property's marketability. In retrospect, the delay benefitted the property.
Time can alleviate one of the biggest hurdles a manager faces in turning a property around - a community's negative perception. A bad reputation continues long after the causes have gone. Even when police calls stop, those in the community remember them.
Eventually, people begin to forget. They drive by a property - see the new landscaping, better cars in the parking lot, quiet and order-and a new perception begins to replace the old. A new property, now called The Birches, had come into being.
The plan - Part 3
With the securing of the construction loan, full-scale renovation began in earnest (Figure 3). To provide continuity to the different materials in 11 buildings, all the eaves and gables were painted pewter. The various brick and concrete buildings were partially sided with cedar shingles and painted pewter. Teal awnings accented the entryways and highlighted the business address.
FIGURE 3 Rehabilitation Schedule The 11 buildings on the property contained a total of 261 units. Renovation was due for completion 18 months from the onset of the construction loan. Month Units Month Units Prior to Loan 43 7 15 1 20 8 10 2 20 9 10 3 25 10 10 4 30 11 10 5 25 12 8 6 20 13 5 Ten units will not be renovated under the construction loan.
Renovation of the units began at breakneck speed. Two models were renovated and furnished. The leasing office underwent a facelift, which was completed over one weekend with no down time. The pool was repaired and painted, and new pool furniture was purchased. The common areas of the buildings were remodeled, and an entry system was added to every building. Additional plantings provided the finishing touch to exterior renovation.
At the same time, individual units were refurbished at the rate of 22 to 24 a month. Workers replaced kitchen cabinets and countertops and installed new double-door refrigerators and 30-inch gas stoves. New 24-ounce carpeting with pads, in either honey beige or grey, were installed in all units. New vinyl tile was laid in kitchens and baths. Plumbing fixtures and vanities were replaced. Dishwashers were added only to the townhouse units because of space constraints. These remodeled living spaces barely resembled the decrepit units of a month before.
As renovated units became available, they were rented for 450 a month (for one bedrooms). Little promotion was done; the renovated property spoke for itself.
One exception was a party organized to showcase the new project to the community. In June 1990, the company hosted the Joliet Chamber of Commerce "After Hours" at The Birches. A festive yellow and white striped tent decorated with clusters of balloons provided space for the guests to mingle. Approximately 400 people from the city's business and political communities attended the poolside barbecue. Guests toured the newly decorated models and witnessed the improvements throughout. The overwhelmingly positive response signalled the change that The Birches had enjoyed.
In conjunction with this event, a short-term "rental sale" was conducted for two months. New residents were offered a stepped lease, with quarterly increases that brought rents up to market rates in the last three months of the year, preparing them for renewal.
By the spring of 1991, the once decaying property that had been called Glenwood Green no longer existed. In its place was The Birches, a property commanding rents ranging from $350 to $750 with only 6.5 percent vacancy as the rehabilitation was ending. Projected income for the year (Figure 4) demonstrates the property's new viability.
[TABULAR DATA OMITTED]
Even more of a testament to its new community acceptance was a neighborhood improvement award presented by the city of Joliet and an Alex apartment award for best renovation presented by the Apartment Council of Greater Chicago and the Chicago Sun-Times.
Today, The Birches is one of the leading properties in Joliet and commands top market rents. With consistent maintenance and with sound property management, The Birches will remain the treasure that it has become.
Robert A. Cagann, CPM [R] is chairman of Cagann & Associates, Inc. and president of Eagle Properties, Inc. and Chief Construction Company. He is primarily involved in multi-family real estate as an owner-operator Through his subsidiaries, he rehabilitates, manages, and leases properties.
Mr Cagann is a senior instructor for the Institute of Real Estate Management and has published several articles in JPM. He has testified before the State of Illinois Legislation Committee on Urban Housing and before the U.S. Senate Committee on Banking and Housing and Urban Affairs Committee.
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|Author:||Cagann, Robert A.|
|Publication:||Journal of Property Management|
|Date:||May 1, 1991|
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