Irvine, Calif.-based private equity firm The Bascom Group LLC has acquired Sunset Cove Apartments in Costa Mesa, Calif. The 123-unit, 48-year-old infill apartment community was acquired for $33.3 million in a transaction that closed April 30.
Sunset Cove Apartments is situated in a burgeoning Westside Costa Mesa enclave with immediate access to major freeways like SR-55, I-405 and SR-73. A number of high-tech manufacturing, biotechnology, healthcare, tourism and professional business services job centers are located nearby, among them the Irvine Business Complex, South Coast Metro and Newport Center. Residents benefit from access to golf courses, beaches and retail centers like South Coast Plaza and Pacific City.
“On the plus side, the location of Sunset Cove is outstanding,” Bascom senior principal Chad Sanderson told MHN. “This is a strong coastal market that has seen, and continues to see, tremendous improvements. Area household incomes along with retail options, entertainment destinations and job centers continue to grow. This property is surrounded by single-family homes ranging in price from $750,000 to $1.5 million. This is a very strong demographic location with limited new supply.”
Paul Diamond, senior vice president of operations for Bascom, reported the company intends to implement a package of modest property upgrades. “That will make Sunset Cove a top choice among multifamily properties in the immediate area,” he added. “These improvements will help to sustain the property over the long term and offer a high-quality living experience for tenants.”
Debt structure proved a primary concern when sizing up the transaction, Sanderson noted. “Lenders have remained very disciplined with respect to debt sizing,” he said.
“They are sizing loan proceeds off trailing numbers and not giving much, if any, credit for future potential growth. That means lower loan proceeds and lower return expectations for investors. However, on the plus side, this also reduces investment risk in the event the broader market loses momentum.”
Renovation costs rising
Among challenges for The Bascom Group were understanding the scope of renovations and dealing with increasing construction costs, Sanderson noted.
“We have seen a 60 to 70 percent increase in renovation costs over the past six to seven years,” he related. “The prior ownership group did a great job of maintaining and running the property. However, all properties of this vintage—1970s—require additional capital to extend the useful life of the asset and keep the offering, (including) unit interiors and amenities, relevant and attractive for potential renters.”
The bottom line is that the market fundamentals in Costa Mesa are strong.
“Costa Mesa has extremely high barriers for new multifamily development,” said Chris MacLeod, Bascom vice president. “Additionally, we continue to see the demographics in the market improve year after year.”