Author: Sam Eaton |Director of Investor Relations, Timberland Partners
When the pandemic struck in March 2020, the real estate transaction market largely seized up. Sellers were not listing properties and did not know how to conduct tours if they did. Buyers struggled to value the real estate and frequently refused to tour properties. For months it was difficult to get a deal under contract. With limited competition, our acquisition team decided to get active. Our scale and experience in the St. Louis, MO market gave the Timberland Partners team the confidence to take on a project when few others would. In June 2020, we went under contract on a newly constructed project called Synergy at the Meadows, in Lake St. Louis, MO. The community was only 30% occupied at the time. Our team believed the purchase price was a steep discount to replacement cost, given the remaining lease-up risk in the property, as well as the relative lack of other buyers in the market given the COVID-related uncertainty. We closed on the property on July 31, 2020 — the first acquisition since the onset of the pandemic.
Fifteen months later, due to the hard work of our on-site leasing and maintenance team, the boldness of that decision paid off with the execution of a substantial cash-out refinance. Synergy was originally financed with a 3-year, floating-rate bank loan (with a 3.25% interest rate floor) from Bremer Bank for $23 million on a $32 million purchase price. Following the successful lease-up of the property, the property appraised for $40.8 million, and we were able to refinance the property with long-term agency financing. Our new $30.6 million Fannie Mae loan has a 10-year term and five years of interest-only payments. The rate is fixed at 3.35% and eliminates our long-term floating rate risk.
Synergy at the Meadows was the first purchase Fund VII made during the pandemic and the fifth for the fund. The Fund invested $10.5 million in cash equity. The new loan produced $6.7 million in proceeds. After reserving $300,000 for capital expense reserves at the property, we distributed the $6.4 million balance to the partners. This equates to a 61% return of the Fund’s cash equity invested in the property.