The Creeks on Tates Creek

The Creeks on Tates Creek
Lexington, Kentucky

Address: 3565 Tates Creek Road
Lexington, KY. 40517

Year Built: 1968

Number of Units: 117

Unit Mix:

• 33 1BD/1BA
• 56 2BD/1BA
• 14 2BD/1.5BA
• 14 3BD/2.5BA

Property Size: 10 buildings, including 1 and 2 bedroom garden style apartment homes and 2 and 3 bedroom townhomes.

Structure:

• Exterior: Brick/Vinyl combo
• Foundation: Crawl space with wood framing
• Electrical; Copper wire
• Roofs: 4 buildings dimensional shingle, 6 buildings 3 tab shingle
• Parking Lot: Asphalt

Amenities: Resort style swimming pool, fitness center, coffee and tea bar, movie room, picnic and grilling areas, and tanning beds.

One of the major reasons we like Lexington, Kentucky is that its economics are very solid and steady, performing at a high level. Evident from its strong 3.3% unemployment rate, which is well below the national average, Lexington doesn’t rely on just one industry. Instead, a diverse array of companies and industries helps to power the economy here. Lexington is home to the headquarters of major companies such as Alltech, Forcht Group of Kentucky, Lexmark, Rhino, Tempur-Pedic, and Valvoline. Amazon, IBM, and Xerox also have large operations in the area.

Just 3 miles away from The Creeks is The University of Kentucky with close to 30,000 undergraduate and graduate students. Many of these students stay in the area once they graduate, providing a highly educated population base from which companies can choose when they making hiring decisions. This youthful population continues to reinforce the economic growth of Lexington. The Creeks is surrounded by shopping, restaurants and other local amenities, and is only 4 miles from downtown. More broadly, Toyota’s largest vehicle manufacturing plant in the world is only 30 minutes away, where 8,200 people are employed and nearly 10 million vehicles have rolled off the assembly line. On April 10, 2017, only 11 days after the Creeks was acquired, Toyota announced its decision to invest another $1.3 Billion in the plant that’s been transformative for the surrounding communities.

The Creeks on Tates Creek was an off-market deal brought to the fund by a property management company that manages a similar property nearby.  The performance metrics from that property showed the Creeks was considerably undermanaged. The property was acquired on March 31, 2017 for $7.45 Million, which is substantially below the cost of replacement. Any new units coming online are competing in the Class A market segment.  Between 2012 and 2016, The Creeks on Tates Creek underwent $1.66M in capital improvements. These improvements range from new roofs, decks, amenity upgrades and unit upgrades. Due diligence revealed one roofs needed to be replaced which the seller paid for through a credit in escrow, otherwise the property is in excellent condition. The existing loan was assumed at very favorable terms – 4.35% with 30-year amortization. There is also an opportunity for an early “supplemental” loan per the lender, allowing an option to refinance within 2-4 years.

At current rents, the acquisition cap rate is 7.9, and the cash on cash return on investment (“ROI”) is projected at 12.5%. With a continued unit refresh plan, there is an opportunity for as much as a 10% increase in rental rates. By year two, the cash on cash ROI is expected to increase to 12.9%, and is projected to grow about 1% each year thereafter. The 10-year IRR is projected at 26%.