As SoCal Real Estate recently reported, Los Angeles–based commercial real estate capital-markets advisor George Smith Partners arranged $18.032 million in non-recourse acquisition/bridge financing for a portfolio of multi-tenant office properties in Orange County, California, on behalf of the sponsor, a full-service commercial real estate investment and operating company based also in Orange County. The financing was arranged by George Smith Partners’ SVP Alina Mardesich and assistant VP Joseph P. Cannizzaro II.
We spoke to Mardesich about this transaction and some of the major trends she is noticing in the financing of office properties in the Orange County market.
SoCal Real Estate: What are some of the major trends you’re noticing in the financing of office properties in Orange County?
Mardesich: The demand for class-B office remains healthy, particularly in class-B mid-rise product. This is a result, in part, of the displacement of large swaths of class-B office space converted to class-A creative office over the last eight or so quarters. Coupled with a good “story,” there remains good value-add opportunity in this space. One of my clients recently acquired a “tired” class-C/B- multi-tenant office portfolio. It’s a good story because the property was acquired off-market, was part of a forced liquidation and because the seller, in its last 20-plus-or-minus years of ownership had no incentive to put capital improvements or TI concessions into the buildings. The buildings look dated and leave a lot to be desired in their curb appeal. Despite these factors, the buildings have maintained relatively high occupancies (85 percent-plus), albeit at below-market rents. The opportunity to reposition these assets within a 24- to 36-month period is an ideal timeframe for investors.
What are lenders looking for at this point in the cycle?
I was a lender for 15 of my 25 years in this business, so I feel like I have a pretty good perspective, particularly in the ground-up and heavy-lift value-add space. Given where we are in the cycle, a good “story” remains key as a way to further hedge against unforeseen changes in the market. Lenders like off-market deals – deals with operational inefficiencies and a strong sponsor track record in a particular submarket. It’s not enough just to rely on value appreciation. Granted, lenders are well covered in their senior position, but interests have to remain aligned, and preservation of value/equity is key. Loan-to-own is not the focus of the business model when raising capital.
What are the biggest challenges you face in raising capital?
Many of the opportunities that come my way involve helping smaller and middle-market developers/investors transition from one source of equity to another. The challenge in raising equity for multi-building portfolios is having to go to different pools of investors for different equity-check sizes. The $3 million to $10 million equity-check writers are not the same as the $10 million-plus check writers. Each investor pool has its own set of criteria and approach to underwriting.