Five apartment buildings in Tucson are set to get added to foreclosure lists after California-based private equity firm Bascom Group, which bought the apartment buildings during the housing boom, defaulted on over $53 million in property loans owed to General Electric Capital Corp.
Analysts say that the difficulties of Bascom Group arose from its risky business decisions, buying many buildings during the peak of the housing market from 2006 to 2007 with low down payments.
For the Sienna Ridge Apartments alone, Bascom Group took out a $12.6 million loan from General Electric Capital with only $390,000 down.
In 2006, the vacancy rate for apartments was 4.5 percent and rental rates were rising from around $597 to around $634.
Nowadays, vacancies for apartments rose to 12.6 percent for apartment complexes with 40 units or more, marking the highest vacancy level since 1992. Rental rates also declined to 2006 levels.
Humberto Lopez, head of HSL Properties, said Bascom Group bought the apartment complexes at very high prices. HSL owns 28 apartment buildings and is negotiating to acquire three more complexes in Phoenix.
Just like other real estate investors, Bascom banked on the rising demand for rental properties and the rising rental rates.
The five apartment buildings with loans in default are Pavilions at Pantano, with a $15.9 million loan; Sienna Ridge Apartments, with a $12.6 million loan; La Hacienda Apartments, with a $10.3 million loan; Verrano Park Apartments, with a $2.6 million loan; and Summit Ridge Apartments, with a $11.6 loan.
In the first months of this year, Bascom Group has already lost an apartment complex to foreclosure lists. Tierra Bonita Apartments was acquired back by Massachusetts Mutual Life Insurance Company through its CB-Apts LLC unit.
According to real estate businessman Bob Kaplan, most apartment complexes getting to foreclosure lists are those which were acquired near the market peak and those that are highly leveraged. He added that he knows ten large apartment buildings in danger of entering foreclosure lists and he knows more defaults are about to occur.
Mike Chapman, another real estate businessman, said the rising unemployment rate also affected demand for apartments. As the unemployment rate rose, vacancy rates for apartments also rose.
To survive in a real estate market where apartment supply overwhelms demand, property management executive Melanie Morrison said that strong apartment management is key to reducing vacancies and reducing the risk of getting added to foreclosure lists.
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