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Case Study: StarPoint Properties’ Makeover of LA’s Emerald Terrace Took Guts and Submarket Savvy
Published: October 01, 2008
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By Michael Russo
MHN Contributing Editor
“Failure to dare is often to run the greatest risk.”
--Capt. Alfred T. Mahan, U.S. Navy (1840-1914)
Capt. Mahan, the father of modern U.S. naval strategy, wrote the book on risk taking. For Paul Daneshrad, CEO of StarPoint Properties, the decision to purchase and rehab the Emerald Terrace Apartment Homes, was one of the gutsiest moves the executive has ever made. While lives were not at stake, the reputation and health of his Beverly Hills, Calif.-based real estate and development company may very well have been.
Emerald Terrace, a 302-unit community in a submarket in Los Angeles known by locals as “Koreatown,” had little curb appeal and a number of deferred maintenance issues. Built in the 1970s, the 40-year-old structure was outdated at best. Compounding its age and lack of maintenance was an inefficient use of space and the lack of any substantial amenities for its tenants.
In addition, the property was subject to rent control, which held the possibility of limiting future tenant turnover.
“At Emerald Terrace, we began to wonder if we were looking at phantom or fictitious opportunities,” says Daneshard. “On occasion, we also asked ourselves, 'What the heck are we doing here'?
“If success was so easy to achieve,” he continues, “then why didn't the original owner of the property just follow through and invest?”
The realization that the seller of Emerald Terrace—a development company at least as smart and sophisticated as StarPoint, according to Daneshard—had failed in its efforts to turn the property around continued to gnaw at StarPoint's CEO as negotiations to buy the complex moved forward.
“It was akin to another software company looking to improve on the Microsoft Windows operating system,” says Daneshard. “Purchasing Emerald Terrace took a leap of faith and great confidence in our management team.”
The goal for the project was to reposition the property to appeal to the now-dominant tenant base in the upscale Korean community and upgrade the structure to create an institutional-quality asset.
StarPoint set about implementing its repositioning plan over a 19-month period. These improvements included:
• fully repair structural deficiencies and address deferred maintenance with a carefully implemented value engineering process;
• take advantage of unused square footage to add amenities and renovate and/or upgrade existing facilities; and
• highlight the existing quality attributes of Emerald Terrace to reposition the property, making it much more appealing to the Koreatown community.
“Emerald Terrace had the potential to be a value-added property, and it had a lot of what we call 'meat on the bone',” says Daneshard. “It was an asset that hadn't been maximized by the previous owner.”
But first, StarPoint needed to seamlessly integrate the two independently run buildings that make up Emerald Terrace, while modifying the existing tenant base.
“Doing a wholesale housecleaning is always difficult, particularly when it comes to the initial execution of the project,” says Daneshard.
StarPoint's primary focus was the development and implementation of customized marketing strategies to capture the high-end tenant segment within the surrounding submarket. This marketing program included the selection of specialized Korean entertainment, such as Radio Korea, to reach members of the Korean community who were interested in selecting quality over price points when seeking housing accommodations.
This was complemented by a management program designed to specifically address the needs of the Korean community, including the addition of Korean-speaking personnel to the on-site property management team.
Sailing in familiar waters
In spite of the risks, Daneshard had confidence in his company's ability to follow through on the rehab because the development team was intimately familiar with the Koreatown submarket and had a veteran management team in place to execute the plan.
Moreover, rents in the area were below market value and Emerald Terrace was laid out well for the tenants StarPoint was looking to attract.
“We really believed this market was about to take off,” recalls Daneshard. “The demographics were good, and demand was going to be very strong due to the limited number of high-end properties available in the submarket at that time.”
To cater to the higher end of the rental market, lead designer and project manager Greg Ledesma focused on providing amenities such as an Internet cafe, a clubhouse and a karaoke lounge in addition to the traditional pool and fitness areas.
“We provided amenities that matched the demographics of the neighborhood, while giving the property a more contemporary feel that blends well with the shops in the area,” says Ledesma, who has moved on since this project to work as lead designer with Form and Function Design Group of Beverly Hills.
Ledesma, who has specialized in multi-housing design for the last 12 years, faced his toughest challenge as soon as he walked through the main entrance of the complex.
“The main lobby leading to the sales office had a very institutional feel,” Ledesma recalls. “In order to make it more inviting and draw people in, we used an 'impact' wall and lighting that highlights the Emerald Terrace logo (see photo). It really helps to identify the property and guide prospective tenants into the office area, where they are greeted by a leasing agent.”
Part of Ledesma's renovation process also included taking unused space and converting it into a plush and intimate 20-seat movie theater. The fitness center was converted from a jumbled, dreary space into an organized workout facility complete with mounted television screens and a wide bank of windows to provide light and expansive view corridors for users.
What had previously housed an indoor fire pit was converted into a chic Internet cafe for working, gathering and socializing. Adjacent to this space, the clubhouse area was transformed from a dark, dated room into an attractive bar area complete with a pool table. The television viewing area, which consisted of a dim, olive-green space with worn furniture, was redesigned into a Karaoke lounge with sleek modern furnishings and a flat screen TV.
All common areas, as well as the building's exterior, were completely renovated. This brought the ambiance of the structure to a higher level compatible with the rental segment StarPoint was shooting for.
In addition, the interiors of all the apartments were rehabbed with stainless steel appliances, granite marble countertops and elegant, updated cabinetry in both the kitchens and bathrooms.
Timing is everything
“The timing was in our favor, and we hit the bull’s-eye on the demand side of things,” says Daneshard. “We surpassed our pro forma rental projections by 100 percent. We expected a 20 percent rental rate increase and got nearly 40 percent. So, it appears that our rehab plan was exactly what the market was looking for.”
At this writing, the success of the project is evident in StarPoint's financial returns. In July of 2007, after owning the property for just 18 months, the company sold the two-building apartment complex for $52.8 million to Fairfield LLC, which resulted in more than a 31 percent increase in value. While the projected investor internal rate of return (IRR) was about 17 percent, the actual IRR was more than 30 percent.
More than anything else, StarPoint's focused marketing efforts captured renters who showed more concern for quality than price when seeking a home environment.
Kitty Wallace, a senior vice president at real estate brokerage firm Sperry Van Ness, says Fairfield has further upgrades planned for Emerald Terrace.
At the time of the sale, Rod Budman of StarPoint said the firm always considered the 1.5-acre property a short-term hold.
Meanwhile, Danshard may not know it, but many of his leadership qualities are modeled after Mahan, a consummate risk taker and one of history's most prominent naval strategists. (The officer's tenets follow in italics):
• Search for a way to win that will result in decisive success.
• Avoid an administrative mindset while not getting too bogged down with balance sheets. Instead, count on the specialists in the submarkets to do the real work.
• Plan for success and know what worked in the past in order to determine what might work in the future. As an expert in repositioning multifamily properties, the Emerald Terrace project fit well with StrongPoint's strengths.
• And, most importantly, take calculated risks. In an 1899 article in McClure's Magazine, Mahan declared, “Risk and the unexpected are as much an opportunity as a danger.”
While nothing really unexpected came up during the Emerald Terrace rehab, the financial risks were always there.
“Buying the community from such a sophisticated and skilled developer was definitely not the norm for us at the outset,” says Daneshard. “Typically, the owners we buy from haven't done a good job maximizing the assets of their properties and adding value, which are two of our core competencies. In this case, we were buying Emerald Terrace from one of the best. We were also willing to make the investments needed to make the property a success.”
StarPoint improved on the previous owner's space management efforts by capitalizing further on Emerald Terrace's assets. For example, designer Ledesma saw the potential in a large storage room on the property and converted it into a state-of-the-art theater.
“MHN's readership is certainly among the best in the industry,” says Daneshard, “but there's always some takeaways we can all share.” According to the CEO, these include:
• understanding your tenant profile;
• differentiating your product within the submarket;
• competing on quality and value—not price;
• understanding the challenges ahead and executing the solutions smoothly; and
• managing the budget and rehab plan tightly.
Finally, of course, says Daneshard, be willing to take some risks.
