Fident Capital secures $23.4M loan for Carlsbad hotel-to-apartment conversion

Fident Capital recently secured $23.4 million in non-recourse bridge financing for the conversion of a 98-unit hotel in Carlsbad into a multifamily housing community, the company announced.

The three-story property sits on 3.12 acres west of Interstate 5 and less than a half-mile from the beach.

A New York-based private lender provided financing at 75% loan-to-cost, or LTC, with a 24-month term and two extension options. The loan also includes a rate stepdown that will reduce the spread and rate floor by 125 basis points once 15% of the units are leased.

The borrower is a vertically integrated developer with decades of experience in San Diego County. The developer recently completed a hotel-to-multifamily conversion in La Mesa.

The financing process was complicated by the property's ground-lease structure and legal status.

The developer was acquiring the hotel's leasehold interest while simultaneously forming a joint venture with the landowner. The landowner contributed its ownership interest as limited-partner equity in the project. The two transactions were conducted independently.

The hotel operator later filed for bankruptcy after the landowner sought a $2 million payment to release the ground lease. Fident worked with the client during court-ordered mediation, helping address the competing interests of the parties.

The bankruptcy case was resolved in five months, resulting in a $2 million reduction in the leasehold acquisition price and improving the project's cost basis, Fident said.

Another complication emerged when the parties discovered the hotel property and an adjacent parking parcel across the street were actually part of one undivided parcel, despite having historically been treated as separate legal parcels. The property also had two separate ground leases.

Because the parcel did not legally exist as a separate lot, the lender could not obtain title insurance confirming a first-lien position. Fident worked with the lender, borrower and their attorneys to structure additional collateral arrangements while a post-closing lot-line adjustment and consolidation of the ground leases are completed.

Fident also faced challenges in establishing market rents for the renovated units. Much of the existing rental housing stock along North County's coastal corridor dates to the 1960s through the 1980s, leaving relatively few comparable properties for newly renovated studio and one-bedroom apartments.

The company assembled comparable properties from several coastal communities to demonstrate the project's pricing relative to older rental housing and newer construction.

The project attracted lender interest in part because of its projected 7.01% untrended capitalization rate on cost and an estimated $319,000 cost per unit for a property west of Interstate 5. The development also will include more than 16,000 square feet of interior amenity space, along with a pool and pickleball courts.

The joint venture with the landowner also allowed the developer to use significant leverage, with less than 5% cash equity required on a capitalization of $31.5 million.

Fident Capital said the project represents another opportunity to work with a repeat client on a complex financing structure while creating additional multifamily housing in coastal Carlsbad.