What an Operator Sees
This one stopped me.
The developer bought the property for $3.5 million, built it in 2019 and later took out a $15.3 million construction loan. It just went through foreclosure at $8.5 million.
That is a $6.75 million gap between the loan and the foreclosure price. The real loss may be even larger after interest, legal fees and foreclosure costs.
The location was excellent and it still didn't work. The building is one block from Sawtelle Boulevard and less than two miles from UCLA.
What appears to have gone wrong was the business plan and the amount of debt. This is a 16-unit building, but it was operated as 48 furnished co-living bedrooms. I have had co-living units and they are hard to manage. It's very management intensive: more tenants, more turnover, more furniture, more management and more expenses. It is much harder to operate than an apartment building and it can become very annoying.
The offering memorandum also says the building is subject to Los Angeles rent control even though it was built in 2019. That is a major detail every buyer should verify before assuming a newer building is non-RSO.
The Regents of the University of California may be the perfect buyer. They paid only $177,083 per bedroom for housing located 1.8 miles from UCLA. They do not need to make the co-living idea work. They already have thousands of students who need housing and can probably charge them $1500 for them.
My takeaway is simple: A bad business idea to do co-living with this much capital and way too much debt and they paid too much for construction.
UC is now buying the same real estate at a price where it may finally make sense for them.
I think some of the best lessons often come from deals that did not work. Share this with an owner, developer or lender who needs to see what too much debt can do to their portfolio.
I track every major commercial real estate sale in Los Angeles so you don’t have to. If you found it useful, share it. If you know someone who is doing co-living, share it with them also for some insights. If you have more information, email me at David@AtlasBrief.La or DM on Linkedin.
