Purchased as part of a suburban office portfolio in 2011, this property had over 50% exposure to a single tenant. Unfortunately, that tenant, a large state pension fund, had seen its credit deteriorate at the same time the submarket experienced a significant downturn. The tenant’s lease was also set to roll shortly after the planned sale, which would likely have placed negative pressure on the exit price.
By offering an attractive TI package which would modernize the dated tenant offices along with some immediate rent abatement, and a rental rate reduction for the existing five years of term, asset management was able to convince the tenant to extend in the property for an additional ten years beyond the existing term. The starting rental rate for the new term would be slightly higher than underwriting. Moreover, in exchange for this modification, the tenant agreed to add an affiliated more credit worthy pension fund as a guarantor to the lease.
By creatively restructuring the lease in this manner, ownership was able to secure significant value for the asset. As a result of this strategy, the investors successfully sold the asset in September 2016 for $201 per foot, doubling the original purchase price in five years despite significant deterioration in the submarket.
Fort Lauderdale, Florida
The property struggled during the 2008 recession and ultimately was foreclosed upon by the lender. Between the economic uncertainty and the changes in ownership, the majority of the ground floor retail tenants exited the property. This left the center with vacancy that was both unsightly and a significant drag on net operating income.
When new ownership acquired the asset from the lender in 2010, the retail occupancy was down to 33% and something needed to be done. The asset management team worked extensively with local brokers to come up with a new retail strategy for the property. At the same time, the team white boxed all the vacated retail space, leaving prospects a clean slate to build out their businesses.
The team focused on attracting high quality, experienced operators. These business served as an amenity to the building as a whole and helped to drive foot traffic.
By diligently targeting select tenants rather than just taking the first lease prospects that were interested, the team was able to build a strong tenant mix. Within 24 months of launching the retail repositioning strategy, the asset management team had successfully turned the retail around, attracting six high quality tenants and bringing the retail occupancy to 95.7%.
Dallas (Wilmer), Texas
The industrial park was developed in 2015 and acquired by current ownership in 2018. In late 2022, it was discovered that the drainage system that serviced the park was not built to proper specifications. In order to develop the remaining parcels, ownership would have to correct this system. Ownership would have been responsible for covering the $7M cost of this work.
However, asset management was aware that there was a dormant Municipal Utility District (MUD) which was originally created to maintain infrastructure which the city eventually had agreed to take on. By transferring the drainage system over to the MUD, ownership would be able to finance the project at municipal bond rates. These bonds would be paid back by property taxes which would be paid by tenants. The project could be financed over 25 years meaning the increase in property tax on an annual basis would be minimal and would decrease as additional buildings were constructed.
By creatively utilizing the MUD instead of just paying directly for the work, asset management was able to prevent at least $7M in unplanned capital calls for investors while insuring that the remaining parcels in the park would be able to be developed in the future.
Las Angeles (El Segundo), California
The Property was builtin 1986 and acquired by ownership in 2011 at 96% occupancy. The submarket had 20% direct vacancy at this time and this property was considered a “value play”. 33% of the subject property’s occupancy was set to roll within the first twelve months of ownership. The building also had significant deferred capital improvements.
Asset management recognized an increasing demand for true creative space over traditional office space in the EI Segundo submarket and began repositioning the vacant space as creative space.
As the property was leasing at a discount to newer office properties in the submarket, competing head to head didn’t make sense if the goal was to raise rents. By instead being a first mover in offering creative space, which was in short supply in the market, the property was actually able to rent for a 20%-30% premium relative to properties that were superior in location, age, and amenities.
Not only did the repositioning strategy improve rental rates, it also helped with occupancy.
Furthermore, the investment sales market recognized the unique position that asset was in, resulting in lower exit cap rate. Over just a three year hold period, The cumulative impact of these factors resulted in an increase in value from $180 PSF to $280 PSF at the time of sale and achieving a levered IRR of 23%.
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