Why this buyer of Santa Rosa apartment complex with 20 empty units paid $14 million

A Marin County multifamily property investment firm that owns about 2,500 units three states took the opportunity to expand its holdings in Santa Rosa with a 57-year-old Santa Rosa apartment complex that “needed love.”

Montgomery Partners led the purchase of Nueva Vista Apartments just north of Coddingtown Mall for $14.75 million, or $199,000 per each of the 74 units. Since completing the deal on April 28, Mill Valley-based firm has started on what’s planned to be $2.6 million in renovations to the three-story, two-building property, located on 2.43 acres at 1333 W. Steele Lane.

“It really hasn't had a lot of updating done to it over the last several decades — bare minimum maintenance and just keep things going,” said Braden Badger, vice president of investor relations. Built in 1966, it had been under the same ownership for the past three decades. “And so we saw a lot of opportunity in refreshing the property, rebranding it and really just management efficiency.”

Occupancy was only 73% at the time of sale, but that was a plus for Montgomery, he said.

“Normally, a lender wouldn’t want to have 20 vacant units out of 74, but in this case they were OK with it because we told them that we’re going to go in and fix those units right away, lease them up and get the (property) up to operational occupancy of 90–95% hopefully by the end of this year or if not early next year,” Badger said.

In addition to modernization of the vacant units are planned upgrades to the common areas such as the pool and sun deck, landscaping, signs, building exteriors, unit balconies, laundry facilities and access gates. The new name for the complex is The Palms at Coddingtown.

This is the sixth Sonoma County property currently in Montgomery’s portfolio, and the fourth in Santa Rosa. Other North Bay holdings are three complexes in Marin County and one in the city of Napa. The company focuses not on top-end apartments but on workforce housing, Badger said.

Santa Rosa is attractive for apartment investment, Badger said, because it’s the largest metropolitan area between San Francisco and Portland, Oregon, is surrounded by hundreds of wineries, is a tourism destination, has multiple hospitals and is home to tens of thousands of Bay Area commuters.

And picking up new properties near existing holdings helps lower property-management costs, Badger said. For California properties, the firm’s affiliate Montgomery Capital Management oversees property operations, but complexes outside the state are managed by third parties.

Of the 32 complexes currently in the firm’s portfolio, there are other clusters of properties in California around San Francisco and in Los Angeles County. In the past few years, investments have expanded to the Reno, Nevada, area and near Denver. Reno is a market where Bay Area tech giants have been expanding out of California. And Denver has a growing population.

Founded in 1983, Montgomery Partners is a real estate investment syndicator, which means it sponsors property opportunities for accredited investors. That means finding an acquisition target, pulling together investors and overseeing property operations.

Montgomery’s typical property hold time from purchase to sale is five to seven years, depending on the economy and property returns, Badger said.

“We’re not necessarily in the churn and burn business to buy and sell all the time,” he said.

The firm still has some properties purchased more than two decades ago, but it plans to sell two or three complexes later this year. One of the challenges for commercial real estate investors today is that financing has traditionally been done with all or part of the term on a form of adjustable interest rates.

And as the Federal Reserve has raised rates 10 times since the beginning of last year in an attempt to control inflation, that has caused property owners with high vacancies to sell them at a loss or let the lenders take them back. Badger said none of Montgomery’s properties are in such an interest-rate bind, but the firm has weekly meetings to review options for properties with financing about to shift to adjustable rates.

Badger sees similarities and key differences to the commercial real estate environment today and during the Great Recession in 2007-2009.

“We need to find willing sellers who realize what their property is worth today is not what it was two or three years ago,” Badger said.

Jeff Quackenbush covers wine, construction and real estate. Reach him at jquackenbush@busjrnl.com or 707-521-4256.