Colorado Real Estate Journal - November 19, 2014

Former condo project sets record

Denver-based MoonStar Investments planned a condominium project in the heart of Cheesman Park in 2010.

Then, the world changed.

“Unfortunately, it was about the worst time in the world to bring a condominium project to the market,” said Marc C. Lippitt, a principal at Unique P r o p e r t i e s L L C - T C N Worldwide.

Scott Shwayder, also a principal at Unique Properties, couldn’t agree more.

“It hit the market just as the condo market became truly terrible,” Shwayder said.

Instead of selling it as condos, especially difficult in the Denver area because of the threat of construction defect litigation, Lippitt and Shwayder sold the 20-unit Alta Vera building at 1284 Downing St. as an a p a r t m e n t building.

They sold it for $7.15 million, or a record price of $357,500 per unit for a Denver property.

That bests the previous sales price record of $332,456 per door for the Verve apartment tower in downtown Denver. An apartment community in Boulder, however, recently sold for $392,857 per unit.

Of course, Verve was a much larger sale, with a sales price of $94.7 million.

Scott Axelrod, principal of MoonStar, completed Alta Vera in October 2010, when the condo forsale market had cratered.

“I never tried to sell them,” Axelrod said. “I probably had three sales I could have closed, but I chose not to, because I didn’t want to end up with a broken condo project,” in which the majority of the units were rented, rather than sold.

In fact, one of the reasons he moved forward with the development in 2009, when the for-sale market already was suffering, was because he figured he could always rent the units.

“I knew, or felt confident, if I could not sell them, I could rent them and they would still cash flow,” he said. “That is what happened. Then, prices (of apartments) got so high that it made sense to sell.” He never dreamed the apartment market would have reached the record levels it has today.

“I always tell people I try not to fool myself and look at the market pretty realistically,” Axelrod said.

“My internal projections tend to be pretty conservative. I never could have imagined in my wildest dreams that the apartment market would be this hot.” The truth was, he wasn’t really interested in selling the building, as the cash flow was strong.

“It’s a very nice building and I was happy to continue to own it,” he said. “Scott Shwayder is a friend of mine and he told me, ‘I have a buyer, who had looked at it when we had briefly listed it before.’” If everything were equal, he still likely could have sold it more as condos than as an apartment building, Axelrod believes.

But the monkey wrench in the works is the construction defect litigation risk.

He still had two more years before he no longer could be sued for construction defects and wasn’t willing to take the risk. He was thinking he would own the property for another two years and then re-evaluate whether to sell the units as condominiums.

“Construction defect litigation put a crimp in this deal,” Axelrod said. “Construction defect litigation puts a real crimp in the entire marketplace.” The amount the buyer offered, “just changed the risk-reward situation, as it was close to what I could sell it for as condos. In this case, everything worked out.” Records show Alta Vera, constructed in 2009, has 24,607 square feet, which equates to a sale price of $290.57 per sf.

By that metric, the price is well below the recent record $443.44 per sf paid for the 57-unit Logan building at 619 Logan St.

Alta Vera received such a high price per unit because of its location and quality of construction, Lippitt said.

It also shows how attractive these boutique urban buildings are to investors, he said.

Lippitt declined to reveal the name of the buyer, but public records show that it was purchased by the Laramar Group based in Chicago.

Laramar, on its website, showed that units in Alta Vera range in size from 1,168 sf to 1,400 sf, with monthly rents ranging from $2,150 to $2,285.

That puts its rental rates from about $1.70 per sf to more than $2 per sf, far lower than most of the new units that recently opened or are under construction in downtown.

“This is really a first-class project,” Lippitt said. “MoonStar is a great developer. Plus, it has this great urban infill location.” Because it was developed to be condos, all of the finishes are top of the line, he said.

By the time the building was ready to hit the market, the market had changed so drastically that there was no point in trying to sell units, he said.

“It made much more sense to rent the units as apartments,” Lippitt said.

There would have been multiple bidders if Alta Vera had been pitched to the entire market, Shwayder said.

“We didn’t really market it to everyone,” Shwayder said. “It didn’t really go out to bid. If it had, I am sure we would have a lot of offers.” He said they had listed it about a year ago and then took it off the market.

“We put it back on the market after the market had really heated up,” he said.

The ultimate buyer had shown a great deal of interest in buying it before and came back to the table, he said.

Asked if the seller might have done as well or better by selling the building as an apartment, rather than selling the units as individual condominiums, Lippitt said: “It certainly is getting very close to that point where it might make more sense to sell a building as apartments.” This is the first time ever in Denver that an apartment building could sell for as much or more than individual condos, Shwayder said.

“I have been in this business for a long, long time,” Shwayder said.

“Always in the past, there was no doubt that you made more money by selling condos, rather than rental units,” he said.

“Now, for the first time in Denver’s history, it is at, I don't know what you would call it, maybe the inflection point, where economically it might make more sense to sell units as apartments, especially when you consider the expense and holding time of selling condos,” Shwayder said.

Despite the record price per unit, the buyer got a good deal, Lippitt said.

“I certainly think there is some room for appreciation and the current owner is going to enjoy increasing rents,” Lippitt said.

He said not only millennials but also increasingly older baby boomers, who are downsizing, are interested in renting rather than owning.

Also, a growing number of renters are interested in renting in neighborhoods such as Capitol Hill/Cheesman Park rather than in downtown.

Units rent for less and neighborhoods such as Capitol Hill are quieter and less congested than downtown, he said.

Lippitt said he wouldn’t be surprised if at some point Alta Vera is converted into condos.

“Maybe you would call it reconverted into condos, since that was the original plan,” Lippitt said.

“At some point, once all of this construction defect lawsuit stuff is worked out, I wouldn’t be surprised if some place down the road, converting the property into condominiums could be an exit strategy,” Lippitt said.