Case Study #4

Monterra Scottsdale Residences

Acquired November 2005. Sold variously in 2006, 2007 & 2008.

Park Scottsdale was acquired in November 2005 as part of a joint venture between our affiliate company (LRC Companies) and a private investment bank. The property was a 128-unit garden apartment community constructed in 1980 and situated on approximately 5 acres of land located in Scottsdale, Arizona.

The property was acquired in the midst of a robust residential real estate market. Comparable condominium conversion projects at the time were selling out in less then six months or in many cases prior to their grand opening. With a limited supply of entry level housing in the Scottsdale market, Monterra Scottsdale (formerly Park Scottsdale) would offer entry into the Scottsdale real estate market for under $200,000 per unit. Our investment plan was to acquire the property, obtain approvals from the City of Scottsdale and the Department of Real Estate, enhance the exterior appearance and complete interior upgrades of all the units resulting in a like-new condominium community. The full conversion was expected to be completed within 12 months after acquisition of the property and full sell-out was expected 6 to 12 months thereafter. In November 2005 we purchased Park Scottsdale for $12.5 million or $97,700 per unit. Including our improvement budget, our all in total cost was estimated to be $17.9 million or $140,000 per unit.

During our first year of ownership, we repositioned the property by completing all mapping and engineering, executed significant improvements to the property and units and commenced new aggressive sales efforts. At the time of our grand opening and throughout the remainder of 2006 we were able to execute and close 38 units. Sales remained brisk in 2007 with 58 closing. In 2008 the Scottsdale area real estate market and economy in general had begun experiencing substantial softening. Although the market was deteriorating quickly, we were able to close 11 units in 2008. Monterra Scottsdale had been considered to be one of the more successful conversion projects in the Phoenix Metro area. Highlights included successfully renovating and selling 107 of 128 units (85%) for an average price of $185,000 per unit and retiring the $14 million bridge loan.

In spite of reaching important milestones, the Scottsdale area residential market had essentially come to a standstill. Different marketing strategies were attempted along with incentives, but velocity did not improve.

Asset Management Repositioning

Allegiant Properties’ Asset Management Group was put in place to identify strategic alternatives and make a recommendation to ownership on the most viable plan moving forward. At the time, there were four viable alternatives that were seriously considered: 1) substantially discount and sell the remaining units, 2) auction the remaining units, 3) lease and hold the remaining units and resell in 18 to 24 months, or 4) lease and sell the remaining units to an investor.

Based on the objectives and expectations of ownership, the alternative selected was to lease and hold the remaining units and reposition for sale in 18 to 24 months. By selecting this alternative, ownership will generate significant cash flow throughout the holding period, avoid selling in a declining market and allow the market to stabilize. The timing should also allow the buyer profile to change back to our target market of entry level first time home buyers and second home buyers (the market had deviated to opportunistic investors during the height of the distress).

Project Status – Fourth Quarter, 2009

Allegiant Properties’ Asset Management Group completed all phases of its repositioning assignment for the remaining 21 units at Monterra Scottsdale. At the time of engagement, all units were in various stages of renovation and were 100% vacant. Allegiant assembled a construction team, selected finish specifications and appliance packages, and proceeded to complete all interior renovation work. Thereafter, select marketing and leasing tactics were implemented which, after only 4 months, resulted in successfully leasing all 21 remaining units. On the average, these 12 to 14 month leases outperformed vacancy in the sub-market by 7.0%, and achieved an average effective rental rate of $1.05 PSF.