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September « 2012 « CGC Commercial

Archive for September, 2012

5th Street Towers Sold at Sheriff Sale

by Chris Garcia, 10:18 AM on September 5th, 2012, No Comments

In May of this year Zeller Properties and Invesco Real Estate purchased the 5th Street Towers at Sheriff Sale for $110M or $103 per square foot (PSF).  The price paid was $1 higher than the next bidder, MetLife the debt holder.  This will be the most significant sale in 2012.  Here is the story:

Zeller initially identified the properties shorty after they sold in 2007 as it sold for a high price and subsequently lost a large amount of Tenants, dropping occupancy to 72%.  From that point up until today the properties have not reached 80% occupancy.  The market is at 85% in comparison.   Clearly Carter Properties purchased the buildings at the absolute worst time possible as the recession hit just a year later.

With the prolonged recession, significant drop in rental rates, and increase in market vacancy, 5th Street Towers was doomed.  The only thing that could have saved the project was an injection of capital however with an extremely high basis price, the investors would then need to hold for 5-10 additional years with no guarantee that the buildings would stabilize.

Late last year the buildings went into foreclosure with the Sheriff Sale set to happen in the Spring of 2012.  The issue with purchasing property from a Sheriff Sale is that most of the due diligence items are not available.  Those items include:

  • Rent Roll- Lease information including size, rental rates, lease  expiration, and lease options
  • Property Inspection- HVAC, roof, elevator, structure, any other item that is sure to come up

Those are the two major items and neither were available to any potential Buyers.  With that, certain assumptions needed to be made.  Zeller did a number of items to understand the properties leases and condition:

  • Reviewed the old Rent Roll from 2007 when the properties were last available
  • Connected with Wells Fargo to understand their lease terms
  • Toured the properties and guessed at capital costs

It turns out the buildings did need substantial capital improvements including new HVAC, restroom upgrades, among the improvements.  However since the properties were purchased at such a low price, the improvements did not affect the investment.  Once the buildings reach a market vacancy rate they will provide significant upside for the investors.

Some interesting facts:

  • Buyers put debt on the buildings just 71 days after purchase
  • Zeller showed up at the Sheriff Sale with an additional $10M, in case someone bid higher than the debt
  • Currently have 2M SF of new lease activity

Future Value

The properties have 370,000 SF of vacancy (around 35%) according to the commercial MLS.  If the buildings were to reach 90% occupancy, essentially lease 260,000 SF of space at a rate of $15 PSF,  then the income would be around $14.4M with a carry cost of approximately $800,000.  That leaves a net operating income of $13.6M.

The value on the $13.6M is approximately $180M.  The cost to lease the vacancies will be in the neighborhood of $40 PSF or around $10M.  If all goes according to plan, the investment will look like this:

Purchase Price- $110M

Lease/Carry Costs- $10M

Total Cost- $120M

7.5% Cap Rate Value- $180M

Profit of $60M