There's new trouble for the owner of Buffalo's struggling Monarch 716 student-housing complex: A second similar large-scale complex aimed at a collegiate population is now embroiled in foreclosure.
DHD Ventures – which is already facing foreclosure and numerous other financial, safety and public relations challenges in Buffalo – is now more than 90 days late on a $31.9 million loan for its Monarch 815 apartment complex.
That's a 576-bed facility in Johnson City, Tenn., designed to house students from nearby East Tennessee State University. It's similar in size and scale – and trouble – to Monarch 716, the 592-bed complex for SUNY Buffalo State students on Forest Avenue.
The developer, led by Thomas Masaschi of Rochester and Jason Teller of Charlotte, N.C., made its last payment on the Tennessee loan in early March and now owes nearly $537,000, according to data from Trepp, a national commercial real estate research firm. Meanwhile, the property also was cited in inspections for numerous "life safety issues."
As a result, the 3-year-old loan was transferred in June to a "special servicer," which handles administration, collection and disposal of debts that are in default. That company, Miami Beach-based LNR Partners, started foreclosure proceedings last month.
"The file is being reviewed to determine the strategy going forward," LNR said in its July loan commentary reported by Trepp.
The pending foreclosure in Tennessee comes as DHD continues to seek out a buyer –and a way out – for its Monarch 716 project on Buffalo's West Side. Built in 2016-2017, the 10-building complex features nine residential buildings and a one-story clubhouse, with 176 one-, two- and three-bedroom suites.
But it's been a continual source of problems for the developer since it opened a year ago, in time for the start of the academic year.
DHD and its first management firm, King Residential, lured tenants by offering special discounts and perks, like two months of free rent. But they ended up bringing in many non-students as well, only to evict them later for not paying. One local attorney said more than 100 people have been evicted, and local real estate sources say the occupancy is now down to 60 percent, though only 35 percent are paying full rent.
The 235,948-square-foot property also has been the subject of numerous visits by police for a range of crimes, and officials have confronted public relations problems from their dealings with tenants and the community. Additionally, various construction contractors have filed liens and even lawsuits against DHD, saying the developer still hasn't finished paying them for the work they did.
Finally, lender Acres Capital filed foreclosure papers in May, claiming it is owed more than $38 million, and demanding payment. The Westbury, N.Y.-based company lists two mortgages from July 8, 2016, including a building loan for $28.44 million and an additional project loan of $7.93 million. The higher total balance stems from additional interest owed on the loans.
According to financial statements included in the Monarch 716 loan documents, DHD estimated the total cost of the project at $44.16 million, including $32.59 million in construction expenses. That’s $74,594 per bed and $187.16 per square foot at the high end.
The firm marketed the property for sale through CBRE-Buffalo, and sources said the developer was asking $45 million but willing to accept $41 million to cover the mortgage and liens.
If that's not enough, a third DHD student housing project is also creating concern. Monarch 544 is located at Coastal Carolina University in Conway, S.C., about 350 miles southeast of the Johnson City property. DHD has been late in payment four times in the past year, and the $23.6 million loan backed by the facility has been on the servicer watch list since early July. Built in 2012, that 440-bed complex is now 82 percent occupied – down from 100 percent when the loan was originated.
DHD officials have not responded to The Buffalo News' requests for comment for more than a year.
DHD is a commercial real estate developer and management firm that operates in New York, Pennsylvania, Tennessee, North Carolina and South Carolina, with more than 500,000 square feet of commercial, residential, office and mixed-use properties. The company's portfolio includes 30 properties, of which 11 are residential and student-housing projects.
Monarch 716 is the only one in Buffalo, but the developer has more than a dozen in Rochester and its suburbs, including the Gannett, Terminal, Alliance, Columbus and Hiram-Sibley buildings, as well as 111 on East.
Masaschi also has collaborated on Rochester-area projects with fellow Flower City developer Robert C. Morgan, whose Morgan Management real estate empire is the subject of an ongoing federal investigation. Morgan's son and nephew, along with two Buffalo mortgage brokers, have been indicted on mortgage fraud charges. Masaschi has not been implicated.
DHD built the 243,596-square-foot Tennessee property in 2014, with 176 fully furnished apartments spread over four four-story buildings. The resort-style complex includes a pool, cabanas, a private yoga studio, a Starbucks coffee and snack bar, an Internet cafe, a fitness facility, a dog park and free Wi-Fi.
According to the rent roll, it includes 64 two-bedroom and two-bathroom apartments of about 926 square feet, and 112 four-bedroom and four-bathroom apartments of 1,404 square feet. Each apartment has stainless-steel appliances, granite countertops, wood flooring, keyless entry, flat-screen televisions and full-size washers and dryers in the units. The beds rent for $582 per month and $656 per month, respectively.
The developer was counting on filling its beds from the state school located less than a quarter-mile away from Monarch 815. Founded in 1911, East Tennessee is the state's fourth-largest university, with about 14,606 students. It houses about 2,355 students in 10 on-campus dormitories, and does not require freshmen to live on campus.
But that demand hasn't panned out, despite a positive start and growing enrollment at the school. While the developer reported a 96.4 percent occupancy initially at Monarch 815 for the fall 2015 academic year, that was down to just 65 percent last year – even though the school said its dorms were full.
According to Trepp, DHD had listed revenues of $4.1 million and expenses of $1.4 million at the time the loan was sold to investors on Wall Street as part of a security on Aug. 25, 2014. However, year-end financial data reported by Trepp for 2017 shows revenues are down to $2.89 million, while expenses have risen to $2.09 million.
In turn, net operating income fell by 70 percent to $804,266, while net cash flow is down 73 percent to $717,866. So its "debt service coverage ratio" – which measures its ability to pay its debt – now shows it can handle only half a year's loan payments, which is well below the minimum requirements that lenders demand. And DHD hasn't submitted updated quarterly financial statements or rent rolls since the second quarter of 2015.
Moreover, according to Morningstar Credit Ratings, that reduced cash flow means the property is now worth only $10.2 million – well below the $31.9 million debt and less than one-quarter of the original appraised value of $44.5 million that justified that loan in 2015.
Then there's the project financing itself. According to industry research firm TCW, the Monarch 815 student-housing project was developed at a cost of $37.1 million. Yet TCW noted that "despite the property's limited performance history," DHD obtained a 10-year "cash-out refinance" loan based on an appraisal of $44.5 million – or 120 percent of the construction cost.
According to county clerk records in Washington County, Tenn., the developer had purchased the property in July 2013 for $2.8 million, and then immediately borrowed $3.46 million from U.S. Income Partners. That's an affiliate of Rochester-based Monroe Capital, a high-rate "hard-money" lender that frequently works with Morgan.
Less than a year later, it took out another $2.94 million in March 2014 and then $3 million more in April 2014, all from U.S. Income, for total debt of $9.4 million. And then, in May 2014, it paid off that debt after borrowing $23.62 million from First Tennessee Bank to fund the construction.
After completing construction just over a year afterward, in July 2015, it refinanced the earlier debt with the $31.9 million loan through Cantor Commercial Real Estate Lending. That's the loan that is now in trouble.
Meanwhile, a November 2017 property inspection found that many emergency exit signs are damaged and fire extinguishers are missing, according to Trepp. In both cases, property management blamed the tenants, calling it an "ongoing issue." Additionally, the flooring in the stairwell and game room of the club house are peeling up, creating "a trip hazard," the Trepp report said.
The loan servicer has contacted DHD about the maintenance issues, and also sent reminders, delinquency letters and now default notices about the debt, Trepp reported.