Ellington foreclosing on Applesway apartments
Cabo San Lucas Apartments in Houston heading to foreclose on $65M loan
A foreclosure has been filed on a $65.2 million loan tied to another of Applesway Investment Group’s multifamily properties in Houston.
EMG Transfer Agent, a subsidiary of investment firm Ellington Management Group, is foreclosing due to missed payments in December and January and allegations of neglect. It is the fifth in a series of multifamily distresses the Irving-based investment firm Applesway has borne this year.
The property is the Cabo San Lucas Apartments on 9220 Nathaniel Street, 3 miles southeast of William P. Hobby Airport, near the Gulf Freeway. The Class E property holds 1,062 units, according to the Harris County Appraisal District.
Cabo Houston Borrower, an LLC tied to Applesway, defaulted on the loan, which it took out in December 2021, according to a notice of substitute trustee’s sale filed on May 12.
The lender sued the LLC in January, citing Applesway CEO Jay Gajavelli as its sole owner. The lawsuit requests the appointment of a temporary receiver citing accusations of disrepair and mismanagement causing a decrease in cash flow.
Applesway, whose CEO was the subject of a Wall Street Journal feature about small-time investors going belly up, and the Cabo San Lucas apartments have been in hot water since last year.
The City of Houston slapped the property with “116 separate habitability violations” in August, according to the lawsuit. Those ranged from structural problems and electrical violations to general uncleanliness, including sewage remnants scattered across the property. The repairs cited in the violations were still unaddressed when the lawsuit was filed, EMG Transfer Agent alleges. State Sen. Carol Alvarado visited the complex in December, after residents accused property manager Indio Management of ignoring complaints of pests, prolonged electrical outages and water leaks.
The complex was only 54 percent occupied in December, compared to its 94 percent occupancy a year prior, indicating a 40 percentage point increase in vacancy since the loan was originated, according to a project memorandum from Sheridan Capital.
The complex underwent remodeling in 2022, according to the Harris County Appraisal District, more than doubling its appraised value to $80 million in January, up $43 million from its January 2022 appraisal of $37 million. Construction company Liberty Home Builders intervened in the lawsuit on May 16, accusing the apartment owner and Applesway CEO of breach of contract, alleging $1.2 million in unpaid services.
A foreclosure auction is expected to be held on June 6. Attempts to contact signatory and substitute trustee Chris Hamilton were unsuccessful, as were efforts to reach substitute trustees Mark Weibel, Manny Gardberg and Sam Murphy. Ellington Management Group and Applesway did not immediately return requests for comment.
Arbor Realty foreclosed on four Applesway properties in April, totaling $229 million.
The woes of Applesway are not necessarily illustrative of a trend, however.
Houston’s multifamily market should not be defined by anecdotal hiccups, said David Putro, head of commercial real estate analytics at Morningstar Credit Information & Analytics.
“It’s a fairly healthy market right now. When the housing market flattens out, the multifamily market tends to benefit,” Putro said.
“Are folks really jumping out and buying their first house, or are they doing another year or two in an apartment given where rates are? The metrics are definitely flattening, but it’s not at the top of the list in terms of major red flags.”