San Marin Apartments

San Marin Apartments
Tucson, Arizona

Address: 5650 South Park Ave.
Tucson, AZ. 85706

Year Built: 1986

Number of Units: 176

Property Layout: 12 Buildings, 5.76 Acres

Unit Mix:

• 88 1BD/1 BA
• 56 2BD/1 BA
• 32 2 BD/2 BA

San Marino Apartments meets our criteria for location by being in a solid secondary metro area. Tucson is one of the top five regions for the aerospace and defense industries in the U.S., and has access to a well-qualified workforce. As Arizona’s second largest city, Tucson is home to the University of Arizona, and to various tech industry clusters that include aerospace, biotech, health-care, defense, IT, logistics, optics and solar. Tucson also serves as a major manufacturing, transportation, and distribution hub for Mexico, California, and the western United States. The region’s quality of life, history, and culture also continue to attract new residents of all ages, helping to fuel additional real estate development.

Tucson offers an outstanding quality of life along with a low cost of doing business. Residents enjoy easy access to the metro’s multiple economic and demand centers including the University of Arizona, downtown Tucson, Raytheon, Davis-Monthan Air Force Base, and Tucson International Airport.

Tucson has experienced 20 consecutive quarters with a rolling four-quarter average vacancy rate below 10 percent. Vacancy in the Tucson metro area has been trending lower over the past several years. As of year-end 2016, vacancy in Tucson was just 6.9 percent, down from 7.8 percent one year earlier, and considerably lower than the peak of over 12 percent in 2009.

Tucson has seen seven consecutive years of job growth, with the strongest gains being in the leisure and hospitality, financial, education, and health sectors. Recent and new job announcements include companies like Comcast, Raytheon, and Caterpillar. Both the Caterpillar and Raytheon jobs are expected to be in the $100,000 per year range, bringing substantial new income to the city. Population growth will continue to support tenant demand for apartment properties. The Tucson MSA is forecasted to expand by more than 15,000 residents per year over the next decade

Commercial construction in Tucson is on the rise with more than 1.5 million square feet under way, including a new $400-million Banner Health hospital building and a 200,000 square foot Banner Health outpatient clinic, a 136-room AC Marriott Hotel, more than 100,000 SF of new office space, and more than 350,000 SF of new retail development

Supply and demand are forecast to remain closely aligned in the Tucson metro between now and the end of the year. The pace of development is slowing after seeing annual inventory growth in the 1-1.5% range from 2012 to 2016. Completions for 2017 are forecast to reach only about 400 units, and multifamily permitting has slowed dramatically, suggesting minimal supply-side pressures in 2018 as well.

San Marin Apartments would allow us to break into the Tucson, AZ submarket – growing the national footprint of our funds while also expanding our professional contacts list. Working with our property management partners in other regions has led to a number of new quality deals, and by opening up this new market, additional quality deals should be much easier to come by and add to deal flow.

San Marin Apartments is a class “B” quality value-add apartment community, conveniently located 10 minutes south of Tucson’s growing downtown. This property was privately owned, and an opportunity arose to take it off the market before an “official call for offers” for $9.5 million by agreeing to going hard on $50,000 of earnest money after a site visit and reviewing all DD property materials.

Upon visiting and inspection of the property, it was found to be in such good condition that no expenditures were needed upon acquisition, other than maybe a couple thousand dollars for landscaping. Additionally, approximately 43 of the units at San Marin (24% of the property) have been fully renovated and are achieving on $75 rental premiums on average. Interior renovations include wood plank vinyl flooring, black appliance package, resurfaced countertops, refaced cabinets, and updated plumbing, lighting, and hardware fixtures. Continuing the rehab project after acquisition offers additional opportunity. Negotiations for the property included among other things eliminating a finder’s fee, reduced management fees from 3.5% to 3%, a reduction in payroll, and an indication from Berkadia that financing would include two years of interest only. As a result, the property was acquired in January 2018.

San Marin Apartments meets our criteria for return. Initial cash on cash returns with interest only is projected at 14.8%. Year two cash on cash is projected to be 16.9% with interest only, and 10.7% without. The 10-year IRR to investors is projected to be 28.5%. Tucson is one of those cities with not a lot of building in general, and certainly no new workforce housing for a while, so management expects to see safe, stable returns over the life of the investment.