The Sponsor and its investment company recognized an opportunity to acquire a mismanaged and poorly maintained office park in a suburban Southeast market, adding value through targeted capital improvements, leasing and stabilization of the asset. Occupancy levels at the time of purchase were well below the submarket averages due to the seller’s tough stance on credit, which included three-year lease terms as the minimum and personal guarantees of lease sponsors. The challenges of the COVID-19 pandemic also led to the property experiencing vacancies from smaller tenants during the 2020 downturn.
Red Oak provided a fixed rate bridge loan of $2.8 million, structured as a 12-month term with two six-month renewal options. Although the property is underperforming, it is well positioned in the market and has good growth potential, with the estimated stabilized occupancy target of 85% versus the property’s current ---%. The Sponsor is planning to complete roof repairs, make cosmetic improvements to the interior/exterior of the office, and upgrade the property’s mechanical system. Additionally, the Sponsor will add new energy efficient systems that are expected to increase the property value and reduce future expenses.
Red Oak is confident in the potential of this property given its prime location and access to key transportation corridors, an international airport, and retail center with big box retailers like Target, Lowes, and Staples. Additionally, the property’s market rent trend has outperformed the market’s average over the past few quarters. The Sponsor is an experienced, knowledgeable real estate investor, giving Red Oak confidence in the future success of this partnership.
Upon stabilization, which is expected to be achieved in 3Q 2022, the Borrower will seek a permanent loan to retire the bridge loan. The property should qualify for a permanent loan of at least $2,950,000 at a 70% LTV, given its prime location, an expanding international airport and the continuing growth near a key Southeast market. The Sponsor plans to hold this property long term.