Deal Download: The Story Behind Largest Multifamily Property Sale of Q1
|Efi Luzon, the senior vice president for Los Altos-based Intero Real Estate Services said he first began walking the patchwork of properties back in 2000.|
The sale of the sprawling 1,800-unit Woodland Park apartments in East Palo Alto by Sam Zell’s Equity Residential to Silicon Valley developer Sand Hill Property Co. and the Abu Dhabi Investment Authority qualifed as a blockbuster deal by almost any measure.
At a confirmed sale price of $412.5 million, the transaction was the largest sale of a single multifamily property in the first quarter. Built in the 1950s, the property encompasses 101 buildings covering 49 acres and are reported to account for half the apartment stock in East Palo Alto.
Also in keeping with Zell’s well known deal-making prowess, Equity Residential originally purchased the property in 2011 in an REO transaction from the lender that had taken it back, paying $130 million.
For this edition of Deal Download, we spoke with veteran real estate broker Efi Luzon, who sold the massive apartment complex for EQR in an off-market and has the distinction of arranging to sell many of the parcels not once but twice.
The senior vice president for Los Altos-based Intero Real Estate Services said he first began walking the patchwork of properties back in 2000, negotiating with multiple owners to convince them to sell or trade their properties. Although the area had experienced poverty and crime in the 1980s and ‘90s, Luzon saw a community with tremendous upside potential located on the San Francisco Peninsula near the geographic center of the Bay Area, roughly halfway between two of the hottest U.S. real estate markets, San Francisco and the Silicon Valley.
By 2007, now-defunct investment company Page Mill Properties had become the owner of the parcels spread across more than 100 buildings. However, Page Hill defaulted on a $50 million loan payment in 2009, one of may victims of the recession, and Wells Fargo acquired the property through foreclosure in 2010, according to CoStar data and public records.
While local leaders, concerned over consolidating ownership of such a large amount of housing by one company, lobbied the bank to break up and sell the rent-stabilized property to multiple owners, Wells Fargo kept the assemblage intact, eventually selling it to Chicago-based Equity Residential (NYSE: EQR) in 2011.
The REIT made significant improvements to the property during its ownership tenure before tripling its original investment in the February sale to Sand Hill and its sovereign wealth fund partner. The sale remains the highest verified selling price for a single-property multifamily transaction so far in 2016, according to CoStar information.
“It began with a personal vision when I started assembling all these small pieces together” for the original property assemblage, Luzon said.
“Later, I initiated a relationship with EQR because I knew that, sooner or later, likely within five years, they would want to sell. After a long period of communicating and staying in touch, sure enough, we created a strong offer, and they accepted it.”
Sand Hill Property Co., which specializes in value-add Silicon Valley real estate projects, has indicated it plans to hold the investment for the long haul.
“They not going to flip it,” Luzon said. “They’re going to invest in and create quality and value for themselves, and to create a nicer looking community,” Luzon said.
“This is the best thing that’s ever happened to East Palo Alto. Sand Hill is doing the right thing by working with the tenants and the city. We’ve spent a lot of money reaching out to this community.”
The timing appears to be good for East Palo Alto, which is finally seeing renewed commercial investment after decades of decline. More than one-quarter of the city has been rebuilt with new housing and retail stock since the early 2000s.
East Palo Alto has a strict rent stabilization ordinance and previous Woodland Park owners, including EQR, have clashed with tenants and affordable housing advocates. However, Sand Hill will adhere to the city’s rent law has no plans to demolish buildings or evict tenants.
“With the large number of units, there’s safety in numbers,” Luzon said in describing the company’s investment strategy. “It’s very hard to find this amount of inventory in the Bay Area.”
Personally assembling all the properties under a common ownership “was like taking an elephant and putting him through the eye of a needle,” Luzon said.
“It took several years and lots of tenacity,” he recalled.
Luzon is an old-school broker who believes in persistence and the value of personal relationships, including his longtime partnership with Sand Hill and ADIA. In 2014, the partnership acquired the Vallco Shopping Mall, a dying three-level, 1.2 million-square-foot shopping center in Cupertino, and the adjoining 180,000-square-foot Macy’s, in separate deals for a combined total of more than $300 million.
Sand Hill is planning to demolish the mall properties and build The Hills at Vallco, a 30-acre mixed retail, office and residential development. As envisioned, the $3 billion development, which will be considered by Cupertino voters in November, would be covered with the world’s largest green roof.
Luzon has built his career executing difficult deals like Woodland Park and Vallco, closing transactions valued at more than $5.1 billion in over 27 years.
“You need to have a vision, to trust yourself, and to believe in your ability,” he said.