Transaction Description: George Smith Partners arranged the Joint Venture equity for the $42,500,000 acquisition of a seven-building industrial portfolio in greater Los Angeles. The existing Trust Deed was assumed due to an onerous pre-payment penalty. The portfolio encompasses 500,000 square feet of improvements. Building uses include big box industrial (24’ clear height with 28’ dock high doors), showroom/flex, and built-out research and development spaces. The high-image buildings have excellent curb appeal. The purchaser is a well-regarded, Los Angeles based investor with institutional investment experience and deep market knowledge. Equity terms included a 96%/4% capital contribution and promotes over an 8% preferred return.
Challenge: Although 95% leased, these assets are only 88% occupied with over 75% of tenant leases rolling in the next 36 months. The seller had an existing low leverage loan in-place with a significant prepayment penalty and a high mortgage constant due to a 25 year amortization. Assumption of the existing loan resulted in a low cash-on-cash yield and an IRR in the low to mid-teens depending on future market rents and inflation assumptions.
Solution: GSP documented substantial rent growth in the sub-market and a 4% vacancy rate. We identified a core-plus equity investor who is knowledgeable of the sub-market and quickly became comfortable with the strength of the sponsorship, low cost basis, and risk-adjusted returns. GSP conducted a lender survey to explore replacing the existing debt and prepared a sensitivity analysis to evaluate low cost alternatives. Allowing for all pre-payment costs, we confirmed a loan assumption would provide the lowest cost debt capital.
