The acquisition of the Timbers is an example of Turnstone Group LLC’s ability to capitalize on a complex situation where it possessed superior knowledge to that of the general market. The Timbers, a 106-unit rental apartment project, located in Apple Valley, Minnesota, was developed in 2003 by a non-profit owner of senior housing projects. By spring of 2005, the project was headed to foreclosure because of a slower-than-expected lease-up and an over-leveraged capital structure, which included four layers of debt and subdebt. Turnstone Group LLC saw the opportunity to gain ownership of a well-located, quality property at below replacement cost through the purchase of the senior debt position. Unable to purchase the senior note directly from HUD, Turnstone Group LLC acquired the note though participating in a national HUD loan auction in September 2005. The total capitalization of the transaction was $11,650,000.
Upon acquiring the senior note, Turnstone Group LLC gained control of the operations of the property and initiated the following plan to stabilize the project and gain ownership of the real estate through a deed-in-lieu transaction with the borrower: 1) expedite the lease-up and stabilize occupancy; 2) reduce the outstanding indebtedness by negotiating settlements with the three junior lien holders; and 3) work with the governmental agencies involved with the initial development to remove the restrictive affordability covenants. After the successful completion of Turnstone Group LLC’s initiatives, the project was marketed for sale.
Turnstone Group LLC stabilized the operations of the project, driving the occupancy from 73% to 95%. The property was sold to an operator of senior housing in September 2007, generating an IRR of 87% and a cash-flow-to-equity multiple of 3.5x.