Took a loss on a 96-unit facility after 31 months and the auction estimate was the first number that lied to me
A deal worth pulling apart: 96 climate-controlled units in a secondary market, bought at a 6.8 cap on trailing twelve months with 89 percent physical occupancy. The seller had been running ECRIs every six months and the rent roll looked clean. What the trailing statements did not show clearly enough was that move-out velocity had been accelerating for four months before closing, driven almost entirely by the ECRI cycle catching up with tenants who had been there three-plus years and had absorbed five or six increases in a row. By month eight of ownership, economic occupancy was sitting at 71 percent and street rates in the submarket had softened enough that re-leasing at anything close to the prior in-place rents was not realistic. The auction estimate given during due diligence, used to size the bridge loan, assumed a liquidation value anchored to physical occupancy at acquisition, not to where the rent roll would be if move-outs continued at the pace the trailing bank statements were already signaling. That single assumption carried the whole debt structure. When the servicer's letter arrived at month nineteen, there was no waterfall language that addressed a partial paydown option before default cure triggered, so the lender had more control over the exit timeline than the borrower did. The facility sold at month 31 for about 11 percent below the original purchase price, and the loss was not the market, it was the auction figure accepted as collateral without a stress scenario attached. The question I would put to anyone underwriting a similar deal right now: what does your lender's appraisal assume about economic occupancy at exit, and have you modeled what happens to that figure if your ECRI pace holds and tenant tenure is already above 30 months on a third of the roll?
