Case Study: Cologne and Saarbruecken

Denver Investment Real Estate Multifamily Building

Investment Type: Multifamily Redevelopment

Location: Cologne and Saarbruecken
Purchase Price: EUR 22.8m
Units: 437
Sq ft: 307,0298
Vacancy: 3.4%
Cap-Rate: 6.33%
5-Year IRR: NA

The portfolio is comprised of 412 residential units, 25 commercial units and 62 parking spaces and garages. It is presented as one portfolio, however, the properties are located in the cities of Saarbruecken and Cologne in Southwest and Central Western Germany, respectively. The properties in Saarbruecken are multi-family homes located throughout the city center with some commercial units and retail shops on the ground floor. The Cologne portfolio encompasses mostly properties around the periphery or suburbs of Cologne with very short commutes to the Cologne city center.

The properties were built pre- and post-World War II, and their respective owners refurbished them over the years. It was thought upon acquisition in Spring the of 2008 that the buildings were in overall good to very good condition and close to fully let. However, it was later discovered that many of the tenants were "phantom" tenants and the condition of the occupied apartments were often poor, due to owner neglect over a long period of time. As a result, the owner representations and warranties were found to be falsified and legal action was sought against the owners. Several court decisions lead to a recovery of claims amounting to approximately EUR 560k. Court proceedings regarding a further EUR 500k are still underway. Had the proper legal framework not been worked into the purchase contract, it would have been very difficult to recover any losses.

The actual vacancy rate was revealed to be around 20% and the capital investment was much higher than identified by the technical due diligence experts. As a result, the net operating income was not enough to cover the debt service. Some of the properties had to be sold during a recession or in a "fire sale," as legal proceedings against the owners took such a long time. Coming to an agreement with the banks, the owners and the property managers was a long drawn out process that commanded vigorous negotiating skills and time, for a comparatively small portion of the entire portfolio. However good the purchase agreement is, there is still no substitution for good due diligence. When it comes down to executing your business plan, it is important not to be bogged down in legal battles or other confrontations regarding the properties. Negotiations were concluded successfully and the properties have since been sold, allowing the banks to made whole and the investor to recover a good amount of his invested equity.