By John Covaleski, Commercial Real Estate Direct Staff Writer

Crescent Heights Inc. has agreed to acquire the 262-unit Palatine apartment complex in Arlington, Va., for $118 million from iStar Financial Inc. and Allied Irish Bank.

The sale price is expected to result in a capitalization rate of less than 5 percent, the lowest cap rate for a large Washington, D.C.,-area multifamily property since 2007. A year ago, such properties were trading at rates of 6.0 to 6.5 percent.

For example, CB Richard Ellis Investors is expected to realize a 6.25 percent cap rate from Mass Court, a 371-unit apartment complex in Washington that it acquired for $105.5 million from Prudential Real Estate Investors. That deal was struck last May, but did not close until last month because the seller had to resolve issues related to the rights of tenants at the complex.

The sellers of the Palatine, at 1301 N. Troy St., were foreclosing on a construction loan to a venture of Monument Realty and an investment fund managed by Lehman Brothers. The fund is not part of the bankruptcy filing by Lehman.

The Monument-Lehman venture began developing the property in 2005 as residential condominiums, but was unable to sell units after the project was completed in 2008, in the midst of the downturn in housing unit sales.

The property has since been converted to rental units and is about 95 percent occupied.

The Washington, D.C., office of Holliday Fenoglio Fowler has been handling the sales marketing of the complex. The sale is expected to close by the end of this week.

Crescent, a Miami developer that submitted its winning bid at a foreclosure auction, is known for converting rental buildings to for-sale condominium structures. From 2002 to 2006, before the housing-market downturn, it acquired nine residential properties in the District's northern Virginia suburbs and sold out six with a combined 3,000 condo units.

It may be bankrolling the Arlington acquisition with funds it had put together for an unsuccessful bid on a portfolio of assets from the failed Corus Bank. The portfolio wound up selling late last year for $554.4 million to a team led by Starwood Capital Group.

Comments? E-mail John Covaleski or call him at (215) 504-2860, Ext. 208.