Fident Capital secured $17.4MM of equity for the acquisition and development of a 209-unit multifamily project within the Three Springs master plan of Durango, Colorado. The $64MM venture will bring much-needed market-rate product to this sub-3% vacancy market.
Our Southern California client, who has had great success in Telluride, studied Durango for a couple years before gaining control of the subject property. After two years of diligent pursuit, an LOI, executed in late 2020, provided extremely attractive terms. The buyer secured the property at a basis which did not account for the “COVID diaspora” from urban areas into tertiary mountain west markets and the significant resultant lift in rents (Durango has seen a 40% lift in rental rates over the last 18 months). Further, the year-long escrow provided ample time to speak with the capital markets, and execute pre-development work, prior to close.
This financing presented several challenges.
First, the client’s balance sheet was not a sufficient counterweight for a $64MM project. Both a 10% equity co-invest and the lender requirements for net worth and liquidity on a $38MM loan were obstacles for a traditional capitalization. As a result, Fident sought either an LP partner willing to provide credit enhancement or fee development scenarios.
Additionally, tertiary markets are notoriously difficult to capitalize with institutional capital. Investors’ concerns about the depth of the market’s buyer pool for the stabilized asset make them worry about being “stuck with the asset” for an unknowable amount of time. Vibrant data with which to validate underwriting assumptions were also scarce with few good comparables and reliable 3 rd party consulting resources. A first person, boots on the ground, underwrite was required.
Finally, the developer was coming into the Durango market for the first time. He assembled a strong team of consultants to support the project but could not point to prior developments in the area, or with the team.
Fident was able to source “operator equity” (a term we use for JV equity that can affect a business plan without a third-party developer) who made an honest and deep investigation of the Durango market. They looked beyond the limitations of the scenario and saw a vibrant development opportunity.
Interests were aligned through the provision of development fees paid, milestone incentive payments, and simple, clean profit participation. Development is slated to begin in May 2022.
