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Uptown in the News  

September 15, 2003
Developers Find Gold in Older Class B, C Properties
By Mark Ruda

CHICAGO-A 165-unit building at 5050 N. Sheridan Rd. in the Uptown community is a multifamily rental asset most institutional investors passed up. Former Equity Residential executive Frank Pons is glad they did.

Pons' Fremont Sheridan Properties Inc. expects to close on the $9.8-million purchase this fall, then embark on a $2-million renovation that is scheduled to be completed in summer 2005. Pons expects his company, which focuses on rehabbing affordable and market-rate multifamily properties, will see a 14% return on its investment.

Despite the potential double-digit returns, companies such as Pons' former employer eschew properties built before 1983. However, that leaves 65% of the market to entrepreneurs like him.

"If you throw in the size category, we're attracting 90% of the market that the institutions are ignoring," says Pons, who aims to make more than $100 million in acquisitions by 2008. "We're about halfway there now."

Pons was on a Chicago Real Estate Council panel focusing on multifamily redevelopment and rehabs.

On the other end of the size spectrum, Rick Wise's Waterton Associates looks to buy multifamily complexes of 150 units or more. However, the top priority is paying less than replacement cost, he tells the Chicago Real Estate Council, while spending up to $20,000 per unit on rehab.

Waterton Asscoiates has spent $2.5 million so far on its 356-unit Printer's Square property in the South Loop, and will likely spend another$1.4 million, Wise says. The strategy includes converting large dining rooms into dens or offices to meet market demand, he reports. However, the project is expected to generate a 25% internal rate of return, Wise says, in large part from converting 160,000 sf of commercial space into telecom use.

Both Pons and Dan Kotcher are fans of Cook County's Class 9 property tax incentive, which reduces multifamily assessments by nearly half to reward developers who rehab older buildings and set aside 35% of the units at rates affordable to those earning 50% or less of the area's median income. However, Kotcher's DKI Real Estate Investment and Development Co. also uses low-income housing tax credits and tax-exempt bonds, which lock him into properties for up to 15 years.

Kotcher is a fan of class B and class C assets, which have not suffered the higher vacancy rates seen by class A owners. "The thing I like about them is, the rents aren't anywhere near where they need to be to justify new construction," says Kotcher, who has focused on that part of the market for the past five years.

Rents in class B and class C properties tend to be at or near the affordable rates required by his low-income housing tax credit and tax-exempt bond financing strategies, he adds. "The trick is finding properties that don't involve a lot of re-tenanting," Kotcher says.

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