|Current Ann. Return||8.0%|
|Accrued Ann. Return||+
|Gross Ann. Return*|
|Current Ann. Return||8.0%|
|Accrued Ann. Return||+ 8.0%|
|Gross Ann. Return*||16.0%|
|Term Remaining||17 of 36 mo.|
|Underlying Security||Preferred Equity|
This is an opportunity to invest in the acquisition and repositioning of a 3-property office portfolio located 30 miles outside of New York City in the Morristown, New Jersey sub-market. All the properties are currently cash flowing with a blended occupancy rate of 91.8%. The sponsor, Lincoln Equities Group (“LEG”), has owned and managed more than 5 million square feet of Class A commercial office space in the New Jersey market during its 30 year history.
LEG closed on the acquisition with Fundrise in May of 2015 at a purchase price of $80,000,000 ($194/SF), which represents a blended cap rate of 9.27% based on the 2014 NOI of $7,416,439.
LEG purchased the portfolio at a discounted “bulk price” due to upcoming lease roll-over and terminations, and plans to reposition several of the properties over in the next three years. Once they have completed leasing and brought all the buildings to “stabilized” occupancy, they plan on selling the properties individually (high-bidders in the market pay 7-8% cap rates) yielding a much greater overall price for the portfolio.
LEG projects a total project cost to complete the repositions of $84,797,900. At closing, LEG along with it’s partners invested more than $11,400,000 junior to the Fundrise position, yielding an approximate LTC on the Fundrise investment of 86.6%. In other words, LEG would have to lose $11,400,000 of value from the asset before the Fundrise position was put at risk.
PP = purchase price Occ = occupancy Cap = cap rate at purchase SV = stabilized value
The largest tenant in the Columbia property “Smith’s Detection” has given notice of its intent to terminate its lease in May 2016 and has already vacated the property, although they continue to pay their full rent. As part of it’s termination option, Smith’s will pay an early termination fee of $1,862,000. On 3/31/2016, Verizon, which occupies 76,109 SF of space in the Southgate property, gave notice of its intent to terminate its lease in March 2017. As part of it’s termination option, Verizon will pay an early termination fee of $1,260,000. Both these fees will be used in addition to the existing equity investment to pay for tenant improvement allowances as part of the releasing process. LEG is currently in discussions with several tenants in regards to filling the space.
LEG projects to increase NOI to $7,725,000 and achieve a lower blended cap rate of 8.50% at planned sale of the assets, yielding an exit valuation in excess of $90,000,000.
LEG closed on the property with a $67,390,000 3-year floating-rate CMBS loan with a floor of 4.75%.
Fundrise investors are projected to earn a gross annual return of 16% paid (8% Current / 8% Accrued) over the 36-month term.
A key risk in the deal is the ability for the sponsor, LEG to reposition the individual properties through their leasing efforts. LEG has owned and managed Class A commercial real estate in the New Jersey market for over 30 years and currently operates more than 5 million square feet of office and commercial properties. In the last 10 years alone, LEG has completed more than 175 leasing transactions for more than 2.5 million square feet of space including over 500,000 SF in the Morristown submarket. This strong track record and along with the companies' specific experience in the market supports their ability to add value over the term of the investment.
LEG plans to manage the building with a focus on renewing existing tenants and expanding them within the buildings. The property has not been actively managed, which was expressed during tenant interviews. Several brokers representing tenants in the area have already expressed interest in the properties and prior to the sale approached LEG directly based on the knowledge that they would be the future owners and were proactive, experienced landlords.
At the same time, LEG plans to negotiate early lease buyouts from those tenants not utilizing their space and use these buyout payments to fund leasing costs for new tenants. LEG's budget has sufficiently accounted for the potential future costs of capital expenditures and tenant improvement (TI) allowance which has been funded upfront through equity and is being held in reserve by the senior lender exclusively for these purposes.
The combined Year 1 NOI for the portfolio yields a Debt Service Coverage Ratio ("DSCR") on the aggregate senior loan + Fundrise investment of 2.07x, and Year 1 Cash Flow after taking into account potential leasing costs and capital improvements still yields a comfortable DSCR of 1.59x.
LEG believes the premium in the acquisition cap rate (9.27% on 2014 NOI) - due to perceived leasing risk for this deal as compared to comparable sales - was significantly overstated and only achievable because of the off-market nature of the purchase and their ability to close quickly with a significant amount of cash. The $194 per square foot purchase price is well below replacement cost and less than what similar buildings in the area have sold at recently.
The existing tenants include large national and multi-national corporations with extremely strong credit: Morgan Stanley (A-), Verizon Wireless (BBB+), LG Electronics (BBB-), and Simon Property Group.
|Gross Annual Return*||16.0%|
|Capital Senior to Fundrise||70-79%||4|
|Capital Junior to Fundrise||10-19%||4|
|Sponsor’s Track Record||$250 million or more||1|
The information contained in the Fundrise Rating is for informational purposes only. It is impersonal and not individualized for any specific investor's financial situation and is not investment advice. These ratings are not intended to be, nor should you interpret them to be, a prediction of how a particular investment will actually perform. You should always carefully consider investments in any security and be comfortable with your understanding of the investment. You may also consider consulting investment professionals.
|Type||Source||% of Total||Amount|
|Equity||Sponsor and LPs||13.5%||$11,407,900|
|Preferred Equity||Fundrise Investment||7.1%||$6,000,000|
The Morristown Portfolio consists of three office buildings totaling 411,737 SF in Morristown, NJ: 100 Southgate Parkway, Morristown, NJ (“Southgate”) roughly 151,404 SF; 1200 Mt. Kemble Avenue, Morristown, NJ (“Kemble”) roughly 106,000 SF; and 60 Columbia Road, Morristown, NJ (“Columbia”) roughly 154,333 SF.
Southgate contains a single, three-story, commercial office building improved with elevators, a full-service cafeteria, an atrium, two outdoor water fountains and outdoor seating. In addition to the current structure, the property is improved with landscaping, concrete sidewalks, and asphalt-paved parking lots. Vehicular access to the subject property is provided from a paved driveway from Southgate Parkway along the western property boundary.
Kemble contains a single, three-story, commercial office building improved with one diesel emergency generator, two hydraulic passenger elevators, a full-service cafeteria, atrium lobby, and outdoor patios. In addition to the current structure, the property is improved with landscaping, concrete sidewalks, and asphalt-paved parking lots. Vehicular access to the subject property is provided from a paved driveway from Mt. Kemble Avenue along the northwestern property boundary.
Columbia contains two three-story, commercial office buildings identified as Building A and Building B improved with four hydraulic passenger elevators, an outdoor water fountain, and outdoor seating. The buildings are virtually identical; however, Building B is equipped with a café and fitness center on the ground floor. Building A has reportedly been vacant for approximately one year. In addition to the current structures, the subject property is improved with landscaping, concrete sidewalks, and asphalt- paved parking lots. Vehicular access to the subject property is provided from a paved driveway along the north from Whippany Road and along the south side from Columbia Road.
|Address||100 Southgate Pkwy, 1200 Mt Kemble Ave, 60 Columbia Rd|
|City & State||Northern NJ|
|Product Type||Office / 3 Occupied Buildings|
|Project Phase||Value-Add / Lease Up|
Morris County is situated in the northeastern section of New Jersey and consists of 40 municipalities including Chester, Florham Park, Hanover Township, Madison, Mendham, Morristown (the County seat), and Parsippany. The County is known for its high quality of life, well-educated work force, and its large concentrations of major corporate headquarters. These corporations are able to draw employees from a great distance due to the region’s highway infrastructure and Morris County’s central location.
Morris County is one of the wealthiest in the counties in the country, boasting an average household income of $132,622, 37% higher than the New Jersey average of $97,052. 74% of the County’s population is employed in white color professions including financial services, pharmaceuticals, telecommunications, and high technology. Three of the portfolio tenants are wealth management firms – Morgan Stanley, Regent Atlantic Capital, and Glenmede – benefiting from the affluent local community.
100 Southgate Parkway, 1200 Mt. Kemble Avenue, and 60 Columbia Road are located in or adjacent to Harding Township. While Morris County is consistently one of the top 10 wealthiest counties in the Country, Harding Township is wealthier still (average household income of $202,858). In taking advantage of this, three of the portfolio tenants are wealth management firms, Morgan Stanley, Regent Atlantic Capital, and Glenmede. It is the location of 1200 Mt. Kemble & 100 Southgate, situated between Harding Township and Morristown that has allowed these buildings to outperform the submarket in terms of both occupancy and rental rates and has insulated the assets against the recent market downturn.
The three properties are located less than 8 miles from each other, off of Interstate 287. The location offers convenient access to I-287, I-78, I-80, I-280, Rt-46, Rt-10, and Rt-24 which allow travelers to reach New York City in 45 minutes, Newark Liberty International Airport in 25 minutes and Philadelphia in 90 minutes. Just 5 miles from Downtown Morristown, the portfolio offers excellent proximity to restaurants, shopping malls, hotels, parks, and daycare centers.
In 2013, Morris County boasted a AAA Bond rating for the 39th consecutive year from both Moody’s and Standard & Poor’s. Moody’s cited the AAA rating as reflecting the Country’s “strong and diverse tax base, well-managed financial operations, which have historically supported healthy reserve levels, and a modest debt burden.”
With over 30.1 million SF of inventory, Morris County has the largest office inventory in the state, 55% of which is considered Class A product, giving Morris County a larger class A than many cities including Orlando, Milwaukee, Memphis, San Antonio, and Columbus. Morris County represents New Jersey’s largest concentration of Fortune 500 companies with over 40 companies either headquartered or having a major facility in the county. Average asking rents are $27.51/SF, and Class A average asking rent is $30.45/SF, a 4% increase since last year. The office market sees very high velocities, with over 3.5 million SF of leasing activity of over the past 2.5 years, the highest of any county in NJ.
Lincoln Equities Group LLC (LEG), established in 1980, is one of the Northeast’s leading full-service real estate companies. LEG has built a sterling reputation over more than 30 years in the market due to the quality of its professionals, ability to outperform in all market cycles and strong relationships with tenants and the real estate community. The company owns, operates, develops and manages commercial and residential properties throughout the tri-state area and Europe for its own account as well as for third-party owners.View full profile
|Gross ann. return*||16.0%|
|Servicing and administration fee||-0.3%|
|Net ann. return to investors||15.7%|