Deal Summary
| Transaction Type | Stabilized Refinance |
| Asset Class | Class A Industrial-Flex |
| Capital Structure | Senior Debt w/ Earnout |
| Asset Location | A Growing North Carolina Market |
| Property Size | 350,000+ SF |
| Total Capitalization | $50,000,000* |
| Senior Debt | $35,000,000* (Regional Bank) |
| Leverage | 70% Loan-to-Value |
*Approximate figures
Project Background
Valencia Realty Capital (VRC) worked with a repeat borrower and client to refinance a 350K+ SF Class A industrial asset in a growth market in North Carolina. Having acquired the asset a couple years prior as a vacant industrial building, the sponsorship had since leased up and stabilized the asset. Given the cost of capital in the market and the lack of activity from the general banking market, the sponsor engaged with VRC to run a market process to ensure optimal terms were sourced. The Client’s objectives were to take out the bridge capital, achieve maximum cash out proceeds for the common equity investors in the deal, minimize recourse, and identify a bank lender that understood the future growth opportunities on the subject site.
Role of VRC
VRC played an integral role, not only introducing the capital, but also assisting with the management of multiple dynamic variables. We provided continual updates to the project’s Argus and financial models, giving real-time insight to the client’s equity investors during the pre-leasing negotiation. This effort proved invaluable for both debt and equity stakeholders in understanding the deal’s slight nuances, as negotiations were being navigated.
Additionally, prior to even beginning conversations with perm loan originators, with the sponsorship focused on construction, lease-up, and day-to-day decision-making, VRC worked with the sponsorship to properly prepare financial reporting packages. While the operator had done the job on the ground, it was now time to communicate the success story to all debt and equity stakeholders through institutional-style reporting. As such, VRC played an integral role in ensuring that the stabilized asset was “capital ready” for a permanent loan solution.
Financing Structure
VRC was able to arrange a 70% LTV perm loan solution with rates in the low 6’s from a regional bank that is very active in the Carolinas and South East right now. This bank is actively sourcing loans for Class A Industrial and Multifamily assets, and they are willing to lend on both stabilized products as well as ground-up construction projects.
Due to the strong DSCR metrics of the subject loan and the strength of the tenants on the rent roll, VRC was able to negotiate a limited recourse loan with additional burndown features subject to future renewals. Additionally, one of the challenges of this deal was that there was some near-term tenant rollover, and many banks were being conservative with regards to their willingness to allow a large cash out to the equity. While this subject loan provided some cash out proceeds, VRC was able to negotiate a future earn out, to boost the cash out to equity following an improved DSCR which would be achieved organically through the contractual base rent escalations.
Adding Value
Our client successfully pre-leased the property to approximately 50% occupancy prior to closing, outperforming initial market lease rate assumptions. This success was attributed to the client’s unique positioning in the niche market and their budget of over $5MM in capital expenditures for site costs, building improvements, tenant improvement allowances, and leasing commissions. VRC’s continual updates and real-time insights played a pivotal role in this process, helping the client confidently navigate their pre-leasing negotiations.
From this case study, we can glean several key insights into the complex and dynamic world of real estate financing and leasing. First, careful communication and management of expectations among all stakeholders is paramount for a smooth transaction. Second, the ability to under-promise and over-deliver on KPIs (e.g. occupancy and weighted average base rental rates) can provide valuable negotiating leverage. Finally, working with knowledgeable partners who can provide real-time insights and handle the many “moving parts” of a deal can make all the difference in achieving a successful outcome.
At Valencia Realty Capital, we are proud to have played a key role in this successful transaction. The ability to navigate the complexities of the deal, negotiate financing terms on the sponsorship’s behalf, and provide our clients with the strategic insights necessary to exceed their own expectations demonstrates our commitment to serving as trusted partners in the commercial real estate space.
Disclaimer: This article is written as a “high-level” overview to illustrate a real-life deal example for educational purposes only. In order to preserve the confidentiality of the Parties involved in this transaction, some identifiable information has been modified slightly including approximations of financial figures. Please do not construe this article as legal, tax or financial advice. As all situations are unique and nuanced, be sure to seek the counsel of qualified professionals before making any investment or financial decisions.
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