Division Street Apartments — Q3 2026
Dear Partners,
Division Street enters the fourth quarter 100% leased — every one of its 59 units — for the first time since Lombard took over management. The last vacant one-bedroom has been leased for an October move-in, there are no notices to vacate on file, and Q3 was the strongest quarter of the year: operating income of $283,056 ran 6.5% ahead of budget, and NOI rose 13.5% over Q2 to $164,933. Twenty-two leases commenced in the quarter at an average 7.6% increase, and debt service coverage recovered to 1.22x.
I want to be equally direct about what we are managing. Expenses are running well above the 2026 budget — mostly because that budget never contemplated our in-house maintenance model, the turnover of the occupancy rebuild, or the water and Comcast balances we inherited from the prior manager. Summer turns also left a payables bulge that peaked at $43.5K in August. To work it down faster, from September we are paying only the 12% coupon on the investor note and have temporarily paused the additional principal payments, as we communicated to you in advance.
The tabs above walk through each piece: leasing and rent growth, the quarter's operating results, a head-on breakdown of the expense variance, and the payables and capital picture. I would point you especially to Valuation & Equity, where you can see what the building — and your stake — is worth today under different NOI and cap-rate assumptions. We have defaulted it to a conservative mark rather than a flattering one, because that is the number we manage against.
From here the work is simple to state: finish clearing the summer payables, keep repricing a rent roll that still sits below market, and deliver a 2027 budget that reflects how this property actually operates. Thank you for your continued trust and partnership — please reach out any time with questions.
The Strongest Quarter of the Year
Division Street is 100% leased heading into Q4. Operating income of $283,056 ran 6.5% ahead of budget and 6.7% ahead of Q2; NOI rose 13.5% to $164,933; and debt service coverage recovered to 1.22x from 1.08x in Q2 — 1.31x once balances inherited from the prior manager are set aside.
Twelve months ago this asset was in the high-80s on occupancy, carrying unpaid vendor and utility balances from its prior third-party manager, with property taxes and insurance booked below the NOI line. The work since has been to rebuild occupancy, reset rents toward market one lease at a time, move maintenance in-house, and clear the inherited liabilities. Q3 is the first quarter in which that work shows up cleanly in the numbers.
What went right this quarter
Occupancy reached 100% leased. Twenty-two leases commenced at a +7.6% dollar-weighted increase, and average monthly rent collections rose for a second straight quarter to $85,792. The Tabor West water accounts normalized (September water $4,066 vs. $11,249 in July), the Laura Lane sewer repair was completed and funded from the lender reserve, and the in-house maintenance team now carries turn and repair work that previously went to outside contractors.What we are managing
Expenses remain well above the 2026 budget — $118.1K vs. $79.1K for the quarter — largely because the budget never contemplated the in-house maintenance model, occupancy-rebuild turnover, or the inherited water and Comcast balances. Summer turn contractors left a payables bulge (peak $43.5K in August) that we are working down; to accelerate that, we have temporarily paused the additional principal payments on the investor note and are paying the 12% coupon only, as previously communicated.Full Building, Rising Rents
The revenue thesis under Lombard management is straightforward: restore occupancy, then bring a rent roll that drifted well below market back toward it at each renewal and turn. Both halves are delivering. Physical occupancy was 98.3% at September 30, moving to 100% with the October move-in at Unit 6450. Year-to-date, 46 lease commencements — 32 renewals and 14 trade-outs — repriced at +6.35%, adding about $4,046 per month of contractual rent (~$48,550 annualized).
| Unit | Event | Prior | New | Δ% |
|---|---|---|---|---|
| 6466 | MTM renewal | $1,295 | $1,418 | +9.50% |
| 6474 | MTM renewal | $1,200 | $1,314 | +9.50% |
| 6456 | MTM renewal | $1,300 | $1,400 | +7.69% |
| 6428 | 12-mo renewal | $1,290 | $1,367 | +5.97% |
| 6476 | 12-mo renewal | $1,275 | $1,351 | +5.96% |
| LL 11 | 12-mo renewal | $1,042 | $1,104 | +5.95% |
| 6454 | 12-mo renewal | $1,296 | $1,373 | +5.94% |
| LL 5 | 12-mo renewal | $1,214 | $1,264 | +4.12% |
| 8 leases | $9,912 | $10,591 | +6.85% |
The clearest data point on what renovated product commands here is Unit 6460, a fully renovated Tabor West one-bedroom re-leased in July at $1,295 against a prior in-place rent of $934 (+38.7%). We would not want investors to read that as typical: most of this year's gain comes from steady mid-single-digit renewals across long-tenured residents, several in place for a decade or more at rents well below today's market. That lever is slower but durable, and it compounds — four more renewals are executed for October–November (+3.4%), with another out for signature.
Resident payment quality remains strong. Past-due rent at quarter-end was about $3,925 (4.5% of monthly scheduled rent) across three accounts; one has since paid in full and another is a housing-assistance payment being reconciled. Prepaid rent of $37,919 at September 30 — largely October rent paid early — speaks to the resident base. A balance from a former resident evicted earlier this year remains fully reserved and with collections.
The Quarter in Numbers
Q3 operating income of $283,056 was the highest of the year, and NOI of $164,933 recovered from a Q2 that absorbed much of the inherited cleanup. Every month of the quarter produced NOI above $52,800, with September — the cleanest month of the year on expenses — at $55,451 (57.9% margin). Year-to-date NOI is $467,297 on income of $795,333, a 58.8% margin.
| Q1 2026 | Q2 2026 | Q3 2026 | YTD (Jan–Sep) | |
|---|---|---|---|---|
| Total operating income | $246,949 | $265,328 | $283,056 | $795,333 |
| Total operating expense | ($89,956) | ($119,956) | ($118,123) | ($328,035) |
| Net operating income | $156,993 | $145,372 | $164,933 | $467,297 |
| NOI margin | 63.6% | 54.8% | 58.3% | 58.8% |
| Debt service (interest-only, 6.35% on $8.3M) | ($131,763) | ($134,691) | ($134,691) | ($401,144) |
| NOI after debt service | $25,230 | $10,681 | $30,242 | $66,154 |
| Capital expenditures (from operations) | — | ($15,668) | ($11,243) | ($26,911) |
| Other non-operating | ($690) | — | — | ($690) |
| Net cash flow after debt service & capital | $24,540 | ($4,987) | $19,000 | $38,553 |
What the normalization shows
Removing items that belong to earlier periods — 2025 invoices the prior manager left unpaid, the legacy Comcast and common-area electric catch-ups, the inherited Tabor West water accounts, and capital work booked as operating expense — lifts normalized NOI to $163,607 in Q2 and $176,638 in Q3, or 1.21x and 1.31x coverage. The adjustment is deliberately conservative: it leaves in $5,375 of earlier repair work paid in September and non-recurring Q2 legal costs. With those balances substantially cleared and the building full, we expect reported coverage to converge toward the normalized level.Why NOI Trails Budget — and Why That Is Changing
We will not bury the lede: revenue is on plan, but year-to-date operating expenses of $328,035 are $90,841 (38%) above the 2026 budget, and that is the entire reason NOI trails budget by 16.6%. The more important question is what kind of overage it is. More than half is inherited or one-time and now behind us; roughly a fifth is a deliberate change in operating model whose offsetting savings sit in other lines; and the genuinely structural piece — property tax — is about $10.8K.
Inherited and one-time (~$50.6K)
Turnover ($19.3K over) reflects the occupancy rebuild from the high-80s to 100%; turn labor is now in-house. Water ($16.7K) is the clearing of mis-routed Tabor West accounts inherited at transition — billed back to residents — and September returned to $4,066. Internet ($14.7K) is the paydown of a legacy Comcast balance left by the prior manager; the bulk contract was renegotiated in Q1 and current service is on autopay.Operating model and structural (~$28.5K)
In-house maintenance ($17.7K net): labor, supplies and replacement parts were never budgeted, while the third-party repair line they replace is running 70% under budget. We think this is the right model — faster turns, better control — and the 2027 budget will carry it properly. Property tax ($10.8K) reflects the actual 2025–26 assessment; the lender raised the escrow deposit accordingly.Working Down the Summer Bulge
The quarter's one operational blemish was on the payables side. Before the in-house maintenance team was fully in place, summer turns ran through third-party contractors, and as accounting came fully online it processed a backlog of stale invoices; together these lifted accounts payable from $9.4K at July 31 to $43.5K at August 31. We have been paying it down from operating cash flow: $40.2K at September 30 after absorbing $15.4K of late-arriving contractor invoices, and about $29.3K after two early-October payments. The loan carries no past-due amounts, and no material late fees have been incurred.
Investor note & distributions
The investor note ($375,000 original principal, 12% interest) has been paid down by $121,086 — $89,862 in 2025 and $31,224 in 2026 — to $253,914 at September 30. Retiring 12% capital ahead of 0%-cost trade payables has served common equity well. From September, while the summer payables are worked down, we are paying only the 12% coupon ($2,539/month) and have temporarily paused the additional principal payments (~$4,000/month), as communicated in advance. We expect to resume them once payables return to a normal operating level.Capital reinvested this quarter
Q3 capital spending of $11,243 was funded from operating cash flow: the Tabor West heating conversion ($2,363), appliance packages for turns ($2,758), turn and paint labor on the renovated Unit 6460 ($5,822), and a $300 remodel item. The Laura Lane sewer repair ($5,771) was funded from the lender-held reserve and is complete.Your Position — A Moment-in-Time Mark
What is the building — and your stake — worth today? This tab values Division Street on an annualized NOI and a cap rate, subtracts what is owed ahead of common equity (the $8.3M senior loan and the $253,914 investor note), and flows the remaining equity to your share. It is a point-in-time mark, not a sale price or a forecast. We default it to Q3's normalized NOI at a 6.00% cap — below today's elevated Portland market cap rates but above the 5.50% we underwrite for a 2029 exit — and you can test every assumption yourself.
| Source | Amount | % of total |
|---|---|---|
| Senior loan (Trimont, interest-only) | $8,300,000 | 67.3% |
| Common equity invested | $3,650,000 | 29.6% |
| Investor note (12%, issued during hold) | $375,000 | 3.0% |
| Total capitalization | $12,325,000 | 100% |
| NOI basis | 5.50% cap | 6.00% cap | 6.50% cap |
|---|---|---|---|
| YTD reported — $623K | $2.77M | $1.83M | $1.03M |
| Q3 normalized — $707K | $4.29M | $3.22M | $2.32M |
| Stabilized — $770K | $5.44M | $4.28M | $3.29M |
How the split works
This calculator shows a simple pro-rata mark: equity value ÷ common capital × your investment. At an actual sale, proceeds follow the operating agreement waterfall: (1) senior loan and investor note repaid; (2) return of common capital ($3,650,000); (3) the 5% cumulative, non-compounding preferred return, net of the $194,357 already distributed; then (4) remaining profit split 75% to investors / 25% to the sponsor. Because the sponsor's 25% applies only above capital and preferred return, it is zero in every scenario on this page in which equity value is below capital plus accrued preferred.The Path From Here
Division Street is full, rents are rising, and the inherited issues that weighed on the first half are substantially behind us. Our focus for Q4 and into 2027 is to convert that operating momentum into reported coverage and, in turn, into retiring the investor note so common distributions can resume.
In-house maintenance model
Turn and repair work now runs through Lombard's own team, replacing the third-party labor behind the summer payables bulge and the turnover overage. Paid listings cycled off as buildings reached full occupancy.
2027 operating budget & payables cleanup
The 2027 budget is being built on the in-house maintenance model and current utility, insurance and tax run-rates, so budget comparisons are meaningful going forward. On payables: the remaining BluePrint balance clears next, PDX is on monthly paydown, small aged items are on the October list, and the legacy Comcast balance retires once an arrangement is in place.
Watch List
Expense run-rate & property tax
Reported coverage needs to converge toward the normalized 1.31x for the plan to hold. The November property tax installment is funded from escrow at the higher assessment, and laundry revenue share is running well below assumption and is under review with the operator.
Cap rates & the 2029 exit
Equity value is highly sensitive to the terminal cap rate (see Valuation & Equity). We underwrite a 5.50% exit in 2029 against today's elevated Portland market; the interest-only senior loan keeps the debt balance flat, so NOI growth carries the recovery.