SouthLake Village is a new construction apartment complex in the fastest growing economic area in Louisiana, and the second fastest growing in the US.
Lake Charles, like much of Southwestern Louisiana is booming. Unemployment is below 4%, and there is a continual influx of skilled labor into the market. Currently, there are approximately $118 Billion of natural gas, petro-chemical, and seaport related projects identified for construction in and around the Lake Charles/Gulf Coast region between 2017 - 2027 and beyond. So far, $48 Billion worth of projects are either under construction or approved for construction. It is estimated that 80% of the remaining projects will “go ahead.”
The Louisiana & Lake Charles Economic Development Council are projecting up to 70,000 construction workers will be required to complete these projects. This influx will undoubtedly overwhelm the already stressed infrastructure.
To emphasize the seriousness of the situation, Lake Charles currently has a total population of around 92,000 people. The city is expected to require housing for an additional 35,000 permanent population over the next 10 years. Our team has been active in the Lake Charles market for some time with several projects including office, senior housing and workforce housing.
Now is the time to meet the increased demand for permanent housing as several of the mega projects enter the production phase and corporate offices relocate operations to Lake Charles. The expansion of Lake Charles is part of a broader economic expansion underway all along the Gulf Coast including communities like Galveston, Port Arthur, and Baton Rouge to name a few. Lake Charles is unique in that it has a natural gas pipeline infrastructure unlike almost any other community in America. It is a natural gas hub. The Port of Lake Charles and the nearby Port Cameron represent a major source of new permanent employment for the region.
The proposed project is a 240 unit new construction Class A apartment complex with luxury amenities. The complex will have a mix of 1BR, 2BR and 3BR units. The property is organized around a central green space with a club house, pool, fitness center and open air grilling area.
The project is organized in 10 buildings of 24 units each. The average unit size is approximately 800 square feet. The project zoning and site plan have been approved by the City of Lake Charles City Council. It is fully entitled. We see this project as fulfilling an acute need for housing. Lake Charles is growing in all asset classes. Many people are moving into single family homes. However, those skilled workers on term contracts need rental accommodations, despite the fact their high incomes could support home ownership. Each of the mega projects (currently 15) requires thousands of skilled workers for an extended period of time.
The sponsors have secured two parcels of land totaling 23 acres at the corner of Weaver (N-S), and Ham Reid (E-W). This subject property is a 13.55 acre parcel on the 5500 block of Weaver Road. It is well located at the South end of the city, where most of the residential development is focused. The city has developed the infrastructure for the expansion of the city to the South.
The Partnership is seeking a construction loan which would then convert to permanent financing upon completion of construction and lease-up. We have completed a 3rd party market study and appraisal. Both reports confirm the feasibility of the project. The city of Lake Charles has been extremely supportive of our project. They understand the market demand for housing. The City Council met on October 4, 2017 and approved the site plan and zoning application. The project is fully entitled as proposed.The project will support 240 apartments in 10 buildings of 24 units each. This complex will have a mix of 1BR, 2 BR and 3 BR units. The rents in Lake Charles are strong and vacancy remains low due to the combination of high paying jobs, strong employment and population growth.
As part of the development work for this project, we had a third party market study commissioned, along with an independent appraisal for the as-completed project. Copies of these reports are available for investor review, subject to signature of a non-disclosure agreement. The hi-lights of those reports are summarized in this document. The market continues the growth trend that has been in place for the past 18 years. It is anticipated that the market will continue to add 1% population and household growth on an annual basis for the next several years. The Consultant performed a competitive analysis of the local rental market. We located seven market rate comparables, all of which are located in the PMA within Lake Charles. All of the comparables are located within 1.9 miles of the Subject, and all offer good access to amenities and employment opportunities. The selected comparables represent the most comparable market rate rental product in the PMA. The newest project in the market is the Springs At Country Club. It is a 252-unit market rate property and is located within 0.9 miles of the SouthLake site in a slightly inferior location. The property, which opened in August of 2017, is currently 96 percent occupied and is in the initial lease-up phase. Currently the property has leased 167 units over the course of eight months, which equates to an absorption rate of approximately 21 units per month. The property exhibits excellent overall condition, which is considered similar to our project’s condition upon its completion.The market report is projecting demand for an additional 1078 Class A units in the immediate area over the next 4 years. SouthLake Village would satisfy approximately 25% of the market demand over that time period. On that basis, the market study supports our assertion that the project is a viable project.
The third party market study made a clear recommendation that our project is well conceived. The following is extracted directly from the market study. Since the completion of the third party market study, our ongoing analysis of the market shows an continuing trend of falling vacancy in the market and rising rents. The newest projects are currently charging rents that are above our pro-forma projections.
Sponsors seek a $30.8M construction loan converting to permanent financing on a 25 year amortization schedule upon lease-up.
SouthlakeVillage Management, LLC, an affiliate of Sponsors will provide the construction management and property management for the Partnership and will own the remaining interests in the land and Partnership. The sponsors of the project seek to limit personal guarantees during the lease-up phase of the project. An initial operating deficit reserve, held in escrow by the lender is proposed to mitigate the lender’s risk. The total project will be built at approximately $165,000 per unit. The projected value of the property at $183,000 - $201,000 per unit upon completion is in line with recent sales in the market.
Project phases and financing
Phase 1: This phase included the land entitlement and zoning approval for the project.
Phase 2: The project will be constructed in a single phase. This is the most cost effective way to build the project with each of the trades moving in sequence from one building to the next in succession. We expect to award the construction contract to Donahue Favret from New Orleans. They are a HUD approved builder with an extensive resume in multi-family construction
Phase 3: Stabilization. The construction having been completed, and the property achieving its occupancy hurdle of 93% occupancy, the process of returning the refinancing the project into its permanent financing will commence.
LAND USE PLAN
The project will be built in one phase of construction. It is designed to accommodate 240 apartments in 10 buildings over the complex located at the corner of Ham Reid and Weaver. Construction of the project overall will take place over 18 months.
Most of the buildings face the interior expanse of green space. The North side of the property faces a retention pond, creating a large visual buffer. The road, parking, and fire lane access surrounds the perimeter of the property. All units have balconies, and the potential to provide a screened in balcony.The apartment complex will feature many desirable amenities including a central pool, playground, golf putting green, club house with party room, outdoor grills and dining area, and a fitness center.
The unit layouts are designed to support single professionals up to small families in the 1BR, 2BR and 3BR layouts. These layouts are shown to the right.
The buildings are designed with the Louisiana climate in mind. The hallways between buildings are open air breezeways, designed to maintain the luxury feel and ambiance of the property, while also minimizing the operational costs associated with air conditioning enclosed common area spaces. The buildings feature a majestic entry way with a towering arch. While the project is large and consists of 240 units, each hallway has only four apartments on each level. This more intimate entry-way minimizes the feeling of a large complex.
UNIT MIX AND RENTAL RATES
The project will contain a mix of 1BR, 2BR and 3BR apartments. The mix of units is based on market analysis. The majority of households in Lake Charles consist of one person and two person families.
Rentals in Lake Charles continue to perform very strongly. We are seeing very low vacancy, and rental rates appear to be increasing monthly. Most of the vacancy in the market is the result of new capacity entering the market during the period of initial absorption. We are confident in achieving rents above our pro-forma projections which are based on the latest monthly rental market data in the market. We have modeled a 3% annual increase in rents. Market rates have increased faster than 3% in recent years.
Expenses are estimated based on similar ratios that our team has experienced on other properties and analysis of comparable properties in the area.The following operating expenses are projected for the project. We have modeled a 3% annual increase in expenses in keeping with inflation averages.
Intrinsic Land Value
The land is being purchased at a price of $5.60 per square foot. The intrinsic value of the land, based on market comparables, is in excess of $7.00 per square foot. The land value is supported by an independent 3rd party appraisal.
The property is serviced with municipal services, with sufficient allocations for the planned development. The City of Lake Charles has planned for expansion of population.Weaver Road is a major North South Road and the utilities are in place at the property line. Part of the conditions of the zoning approval includes the widening of Weaver Road to create a turning lane prior to our driveway so as to minimizer the impact to traffic on Weaver Road. We will also be required to build a tall perimeter fence to the neighboring residential neighborhood to the West. The land is well drained and includes a 3 acre storm water detention pond that is sized to handle a 25 year storm event. There are no flood zone issues on the property and we will not be required to elevate the buildings above grade. Despite this, we plan a modest slab elevation just to be safe.
The individual buildings are built in pods that are built on slab concrete with footings as required to meet the soil stability. The stairwells are built in poured concrete. The units themselves are wood framed construction.The club house and amenities will be stick built on site. Here is the overall budget for the project.
RENTAL MARKET OVERVIEW
Several recent market studies have been undertaken in Lake Charles. We believe that the strong employment situation, combined with the growth in population will continue to keep rents healthy. Here are some of the hi-lights.The specific sub-market consists of approximately 15,400 qualified households with approximately 25% expected to rent. This gives us a demand for 5,700 units. The supply of multi-family units in the market remains about half that number at 2,300 units. The two most recently completed projects in Lake Charles have added a total of 405 units to the market supply. The absorption averaged 16.5 units per month in each of the two projects. We believe the market is not saturated, and will continue to absorb at a similar rate of 16 units per month for a new project such as SouthLake Village.Many of the new projects are finding tenants with a household income of over $90,000 per year. That’s not your typical tenant profile.One of the major factors affecting this rental profile is the percentage of contract employees in Lake Charles. Approximately 65% of employees in Lake Charles hold permanent positions. The remaining 35% are contract employees who are unlikely to purchase, even if they can afford to. These contract employees are tenants, and they are replaced by other contract employees who will also rent.The two newest projects to lease in Lake Charles have been renting at an average of $1.43 per square foot. Smaller one bedroom units in new projects have been renting close to $1.65 per square foot. This project will be in line with the rental comparables in the market.The most recent market data from June 2018 shows rents of $2.61 per square foot. This is a reflection of the significant increase in demand and a shortage of supply.