A pair of real estate investment firms agreed to invest $22.5 million of equity to acquire and recapitalize PJ Finance Company, which filed for Chapter 11 bankruptcy protection in March 2011.
New York-based Gaia Real Estate and an unnamed affiliate of Starwood Capital Group will invest their capital primarily for deferred maintenance, capital improvements and renovation work to stabilize the bankrupt portfolio.
Over the next eight years, Gaia and Starwood are prepared to implement a $45 million capital improvement plan to the bankrupt portfolio that will be managed by Pinnacle Company.
PJ Finance Company’s assets include a multifamily portfolio consisting of over 9,500 multifamily units located in major metropolitan areas throughout the Sunbelt region. More than 45% of the units are in Dallas, with additional properties in Phoenix, Atlanta, Houston, Nashville, Fort Lauderdale and Orlando.
The portfolio was originally acquired in 2001 and recapitalized with more than $540 million of securitized debt financing in 2006 at a valuation of $580 million. However, during the economic downturn, the portfolio struggled with its debt load and occupancy suffered as capital was unavailable to turnover units for new tenants.
During this time, more than 1,700 units were taken offline and occupancy levels depressed to 72% in markets that usually did not contain vacancies less than 90%.
However, while in Chapter 11 bankruptcy, $14 million was reinvested into the portfolio and current occupancy has improved to more than 90% as about 1,000 units were brought back online.
“We are excited to partner with Gaia to unlock all the substantial upside potential in these attractive assets,” said Chris Graham, managing director of Starwood Capital Group. “We believe the structure of this investment is quite unique and allows us to maximize the value of the portfolio with very little downside risk.”
As part of the recapitalization agreement, the debt has been restructured into three tiers. The first tier is $423 million, while the second and third tiers are $52 million and $28 million, respectively.
According to the firms, interest will only be payable on the first tier during the term of the loan, with no interest payable on the second and third tier. The loan matures in 2020. The new equity will earn a 16% preferred return for the investment firms and all principal and interest will be senior to the loan’s principal.
