At A Glance:

LocationA Growing North Carolina Market
Transaction TypeAcquisition
Capital StructuredSenior Debt, Mezzanine, Co-GP
Property TypeClass A Industrial-Flex (Vacant)
Property Size350,000+ SF
Total Capitalization$35,000,000*
Common Equity$9,000,000*
Mezzanine$8,000,000* (Institutional Asset Manager)
Senior Debt$18,000,000* (Private Debt Fund)
Leverage75% Loan-to-Cost

*Approximate figures

Project Background

Valencia Realty Capital (VRC) was approached by an independent yet established sponsorship group who had previously stabilized two comparable industrial deals in the immediate market. With another Class A industrial-flex property acquisition in sight, the client sought Valencia’s expertise in arranging a financing structure that would optimize leverage while minimizing risk.

The 350,000+ SF industrial-flex property in a burgeoning North Carolina market presented a unique challenge. The property had been left vacant by the previous owner, leading most capital prospects to presume inherent risk. Coupled with a rising rate environment, the quest for high leverage financing was complex. Furthermore, the deal had many dynamic variables, including an active LP equity syndication, initial potential environmental concerns, negotiations with an overseas institutional seller, and a continually changing pro forma based on new lease negotiations.

Role of VRC

VRC played a highly integral role in this transaction, not only introducing the capital but also assisting with 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 capital sources in understanding the deal’s slight nuances.

Financing Structure

The total capitalization of the deal was approximately $35MM. VRC arranged approximately 75% LTC in structured debt, comprised of 50% LTC senior debt from a private debt fund and the balance as a mezzanine loan funded by a NY-based institutional asset manager. The debt capital terms were attractive, including a 5-year bridge term with 3 years of interest-only payment schedule during the initial term, and mid-teens pricing for the mezzanine debt. The senior and mezzanine capital proved more attractive than private senior-stretch capital from a blended cost of capital at the level of leverage achieved, given the risk profile of the deal.

In addition to structuring and sourcing the debt stack, VRC efficiently matched a co-general partner (co-GP) with a complementary background who made substantial contributions to the partnership.

Adding Value

2.6MM-Preferred-Equity-for-45.1MM-Condominium-Development-Case-StudyOur 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.

Upon stabilization, estimated within 6-12 months, the sponsor plans to refinance the property with Valencia to retire all, or a substantial portion, of the initial capitalization. The appraised as-stabilized value was north of $50MM, allowing for a senior debt refinance of 70% LTV supported by a DSCR north of 1.20X.

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 key KPIs such as achievable leasing 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, managing dynamic variables in a complex deal environment. The ability to navigate the complexities of the deal and provide our clients with the strategic insights necessary to exceed their leasing and financial goals demonstrates our commitment to serving as trusted partners in the commercial real estate space.

To learn how Valencia Realty Capital can help to increase leverage and unlock trapped equity, contact us today.

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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.