Litigation, construction needs push Southstar to list condemned apartments

GrowthSpotter contributor

When Southstar Capital Group spent $67 million on a 306-unit multifamily development and renamed it Sola at Celebration in 2016, they did so, says President and Chief Financial Officer Gina Williams, “at a top price, because we were confident in the Celebration market.”

That assessment of the sector is proving true, she says, adding that it will benefit the property’s next owner.

Southstar listed Sola for sale in July, with CBRE Group as broker and no up-front asking price. Its six buildings had been condemned in August 2017 by Osceola County -- and tenants had fled, wiping out Southstar’s expectations of roughly $300,000 in monthly rental income.

“Because we are not a construction-based company, and in light of our fiduciary responsibilities to our investors, we had no other option than to list the property for sale,” Williams told GrowthSpotter this week.

Palm Beach-based Southstar sued developer Urban Oaks Builders and its parent company, Texas-based Hines, in February, saying the companies and affiliates withheld, concealed and misrepresented defective building conditions at Sola.

So far, neither side has benefitted: Urban Oaks filed for Chapter 11 bankruptcy protection earlier this month. Hearings on a motion by Hines/Urban Oaks to dismiss the suit were cancelled because of the bankruptcy filing. And Williams cites litigation expenses as a factor in the decision to sell.

Condemned properties, says John Crossman, CEO of investment-property broker Crossman & Co., are not necessarily off-putting in general.

“There are some people whose whole business model is finding hairy deals – the hairier, the better,” he said, speaking generally. “In about any scenario you can think of, there are people who follow these deals around: People who look for properties with different types of issues.”

In similar situations, Crossman notes, the simple way to market the property is “aggressively.” And good brokers just need to understand what they have.

“On our side, we’re always just trying to do as much research as possible, to know all the issues, be as educated as possible about the property, and create the biggest, most diverse buyer pool.”

Getting educated in many cases, he says, means bringing in a consultant to determine the cost of fixing any structural problems or whether they can be fixed at all, if buyers who are looking to start from scratch are the best candidates. Regardless, he notes, transparency is key.

“Put it all on the table, disclose everything, and then find the right buyer. Typically, there always is one.”

Williams says Southstar would have preferred to keep the property, had it been able.  Attempts to reach CBRE representatives for comment were not successful.

 “This property is in a great market and would have been one of our most successful investments, had it been built properly and to code,” she said.

Its next owner, she said, “would own the property at a deeply discounted price, and once construction is completed and the buildings leased back up, the valuation could reflect a tremendous investment. The multifamily real estate market is extremely strong, and properties are selling for record-breaking prices.  There is phenomenal potential for any buyer.”

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