Case Study: 3142 Fairfield Avenue

Case Study: 3142 Fairfield Avenue

This case study delves into the transformation of an 8-unit mixed-use property, a blend of residential and retail spaces, located in the vibrant Black Rock neighborhood of Bridgeport, Connecticut. Constructed in 1917 and recently renovated in 2023, this 8,500 square foot building stands on a 0.18-acre site and features a variety of living spaces including four two-bedroom apartments, one three-bedroom apartment, a spacious one-bedroom unit, and two commercial retail units. The property also includes 6 off-street parking spaces, adding convenience for residents and visitors alike.

Location

The historic Black Rock section of Bridgeport has had one of the largest increases of home values in the country. Rents are rising and the building is located on the busiest street in Black Rock, Fairfield Avenue. It is also located less than 0.25 miles from the Fairfield border.

Further fueling Bridgeport’s market development are notable developments in the Black Rock vicinity, such as the new Fairfield Metro North Train station, a mere 1.5 miles away. Across the street is a planned 46-unit apartment complex and 300 additional apartments are under construction. 

Bridgeport’s transformation is also evident in attractions like the new Bridgeport Amphitheater and Steel Point Marina, alongside the influx from mass relocations.  Situated just a quarter-mile from the Fairfield border, Black Rock, with landmarks like the scenic St. Mary’s by the Sea, has long been a desirable neighborhood.

Background

Redwood Capital Advisors was able to identify and purchase the building off-market from a ‘mom-and-pop’ seller for $1.34M. Utilizing their favorable financing relationships to then secure a ~$1M loan from a local credit union. They subsequently raised ~$500K in equity to successfully on the transaction. 

The out-of-state seller utilized a typical property management company which resulted in bloated expenses and a rent roll below market levels. Quickly after purchasing the building, RCA implemented a strategic CapEx program that increased both Revenue and NOI. The property was contracted for sale 8 months after purchase at $1.825M, reflecting around a 36% capital appreciation. This sale was finalized in October 2023 – 12.5 months after the acquisition. It strategically aligned with long-term capital gains, resulting in over 18% returns for Limited Partners over a 12-month period.

The sale now holds the Bridgeport, CT record for the highest price per unit in a sale at $228,125 per unit. The previous record in Bridgeport was held by 333 State St, a 67-unit mixed-use property, which sold for $202,985 per unit in 2021.

Business Plan

The building, acquired by the current owners 15 years ago, presented a significant operational upside due to their lack of experience. With an established presence in the Fairfield County market, and a reliable team of a proven general contractor, property manager, and leasing team, this property seamlessly integrated into RCA’s portfolio. At acquisition, the in-pace apartment rents were ~30% below the market rate, and the expense ratio was at least 10% higher than it should have been. 

The original business plan was to implement the strategic CapEx program slowly over a 3-year period and then market the building for sale. For this reason, they opted for financing through a local credit union to avoid prepayment penalties.

Prior to purchasing the building, cash-for-key agreements with 4/6 apartment tenants to move out post-close were reached. At that time, RCA’s general contractor was given access to examine the units to pre-order all the materials needed for the 4 apartment renovations. Renovations, starting two days post-closure, included overhauls of kitchens, bathrooms, flooring, electrical, and plumbing systems, and the addition of in-unit washer-dryers, with an average expenditure of $33K per unit. This resulted in a 27% ROIC. Minor updates to common areas and the exterior were also made to enhance curb appeal and leasing prospects.

Concurrently, rents for the remaining two legacy apartment tenants were raised by 10-20% upon lease renewal. The 2 retail spaces, already close to market rent, were under long-term leases with substantial increases.

RCA prepared 3D floor plans and interior renderings for early marketing of the units.  It still took about 4 months to achieve 100% occupancy due to the leasing period beginning in December, a seasonally slow period. The process included one eviction, a procedure RCA is well versed in, taking roughly 2.5 months in Connecticut.

The value-add process resulted in a ~60% increase in NOI from ~$74K at purchase to ~$118K on a run-rate basis after 7 months. Despite an initial plan for a longer hold, RCA has already achieved the projected NOI growth that was supposed to take 3 years. Therefore, they decided to test the market and listed the building for sale at the originally projected sale price of $1.875M. 

Less than a week later, despite record-high interest rates, they received an all-cash $1.825M offer from a 1031 buyer and immediately accepted. The sale was strategically delayed for 4 months post-PSA execution to qualify for long-term capital gains, resulting in an LP IRR of over 18% for the 12-month period.

The sale now holds the Bridgeport record for the highest price per unit at $228,125, Surpassing the previous Bridgeport sales record of $202,985 per unit set by 333 State St, a 67-unit mixed-use property in Downtown Bridgeport in 2021.