Mill Creek Walks Away From “Distressed” Oakland Apartments

UDR has seized a 173-unit apartment building in Downtown Oakland from development partner Mill Creek Residential, which walked away from a losing investment.

The Colorado-based real estate investment trust took control of the Residences at Lake Merritt at 1940 Webster Street after the Florida-based developer tossed it the keys, the San Francisco Chronicle reported, citing a regulatory filing and an earnings call.

While Mill Creek said on its website it had “sold” the two-year-old building last month, public documents filed this month by its former investor suggested the developer never made a dime.

Rather, UDR said it “took ownership” last month of the eight-story complex once known as Modera Lake Merritt, according to a fourth-quarter 2023 earnings report.

“I think everybody is pretty familiar with what happened in Northern California since pre-COVID, with rents still being down and then in Downtown Oakland, perhaps one of the worst submarkets in that respect, with rents still down 30 percent plus,” UDR President Joe Fisher told investors Wednesday during a conference call.

“And so we did take the keys back on that asset, as the developer didn’t want to continue to support the cash flow shortfalls.”

Mill Creek’s exit caused a loss to UDR of $24.3 million, Fisher said. The property was appraised at $67 million, or $387,000 per unit.

In early 2019, UDR formed a joint venture with Mill Creek to develop the apartments at 1940 Webster, providing $45 million in equity, according to the Chronicle.

Mill Creek, which built the project, took out two construction loans of $67 million and $40 million. The newly rebranded Residences at Lake Merritt rents studio, one-bedroom and two-bedroom apartments beginning at a respective $1,779, $2,175 and $2,880 a month.

UDR informed investors this month that “occupancy is currently below 90 percent.”

Fisher said on the earnings call that Mill Creek had been offering “two to three months” of rental concessions in order to fill the building, now the “norm” in Oakland.

Mill Creek informed the REIT late last year it “would not fund its share of a capital call,” or the financing needed to support the project, according to UDR. The firm agreed to turn its interest in the joint venture over to UDR, the firm said in its filings.

Fisher said the “distressed” property was impacted by upfront costs and delays, softening rents and a “historically high” amount of new housing in the market, in addition to high interest rates and lack of available capital.

“Those are the three main areas we are trying to underwrite when we go into these [deals],” Fisher said. “Clearly, any one of those factors is not going to be enough to drive distress on any of these deals. But when you get a couple of them that stack up, you do run into a little bit more distress, which is really what happened with Modera Lake Merritt.”

Asked why UDR didn’t “just try to sell” the project, Fisher said the plan is to “burn off the concessions” and try to lease up the property to get a “better value” for it in the future.

The average rental rate for a one-bedroom apartment in Oakland is down 25 percent from a peak prior to the pandemic, according to a Chronicle analysis of data provided by Apartment List.

Downtown Oakland, where offices have been hollowed out during a nationwide shift to remote work, has seen a spike in violent and property crime, causing Gov. Gavin Newsom to send in more than 100 California Highway Patrol officers.

— Dana Bartholomew