Others are more cautious. Jack McCabe, CEO of Deerfield Beach, Fla.-based McCabe Research & Consulting, a market research firm, believes that, in general, paying more than 50 cents on the dollar for assets in Florida might be too high right now.
While Rosenthal acknowledges that there’s some softness in the portfolio, he sees it as a springboard to developing a platform in the Sunshine State. “The long-term fundamentals in Florida will be good,” he says. “In the near- to mid-term, we think it will continue to be soft, but we’re very interested in Florida, especially the southwestern and southeastern coasts.”
The Barclay’s debt transaction at the end of 2007 set the stage for Northland’s second deal with Tarragon. In March 2008, the two firms agreed to set up a joint venture. Northland would transfer its 14,433 units from its portfolio to the deal, including the six properties it had just bought from Tarragon, and get a controlling 77.5 percent interest in the joint venture. Tarragon would contribute an additional 7,433 units to the deal, get a 22.5 percent interest in the new venture, and get a $50 million loan commitment from Northland. The proceeds of the loan, along with additional cash from Tarragon, would have been used to purchase part of Tarragon’s subordinated debt at a discount.
Just as the deal was about to close, Tarragon says that GE Capital Corp., which held the debt on 23 Tarragon properties, wouldn’t consent to the plan. In September, Northland sued for specific performance and damages. Shortly after, Tarragon countersued, claiming that Northland misrepresented the facts and harmed the joint venture’s ability to claim the GE Capital debt. After the deal fell through, Tarragon entered into a deal to restructure $125 million of its debt with its lenders.
“The agreement was conditioned on getting GE’s approval for the change in control of the Tarragon properties, which they financed,” says William Friedman, CEO of Tarragon in a statement to MULTIFAMILY EXECUTIVE. “The day after Northland failed to close on an apartment property they had agreed to purchase from us, they sued for a return of the $250,000 nonrefundable deposit. GE thought that kind of behavior from a would-be partner did not bode well for [their] future.”
Rosenthal believes the blame lies with Tarragon. “The breach of the joint venture agreement was an ill-fated attempt by Mr. Friedman and Mr. Rothenberg to advance their goal of collecting on personal loans to the company. The market has reacted accordingly, with Tarragon stock down over 95% since the breach occurred. Furthermore, their manipulation of the lender consent process has produced a default under the GE Loan and will cause their primary lender to recognize a major write down in the inevitable bankruptcy proceeding.”
GROWTH SPURT
Rosenthal, for one, is eager to move past the suit and says the botched venture did not handcuff Northland. The proof? Northland’s August deal with REIT Equity Residential.
After two private equity firms bailed out of a deal to buy 2,985 apartment homes in Austin from Chicago-based Equity, Northland (which had bid on the deal originally) stepped up, paying $270 million for the nine Class A communities. Rosenthal says Northland got the properties at a $30 million discount. It pulled $65 million out of its $200 million Fund III, which closed in January 2008, to facilitate the deal.
