Challenge

The transaction was a three-building portfolio of incubator industrial units that measure just under 30,000 square feet with 22 tenants. All of the tenants in the park were on modified gross leases and were between 50% to 70% below market. All of the current tenants had allowances for base year reimbursements in their leases that were currently not being enforced by the landlord or marketed by the brokers.

Strategy

There was a relatively short WALT, so the agents were able to perform a gross-to-net conversion and raise the rates substantially. The project was purchased with a 3.5% fixed rate, 10-year, fixed-rate debt with two years of interest only on the front end of the loan. The agents were able to use a BOMA calculation to revise the marketed rentable square footage and increase the size of the business park by nearly 10%.

Results

The property has now been stabilized in the low 7.0% cap range, and there will be a $1 million earnout occurring upon the second anniversary of the loan. This asset is now fully stabilized and will allow ownership to continue to operate a generational asset that has no threat of competitive supply within the submarket.