Challenge

This building was purchased by a private investor and was the up-leg of a 1031 exchange. The down-leg of the exchange was a duplex located in Costa Mesa, CA. The ownership group realized through our advisory that they had limited upside on cash flow at this property due to rent control and had over $1.4 million of equity to unlock with a sale.

Strategy

As a result of these discoveries, they decided to sell the two-unit at a highly compressed cap rate and trade into a single-tenant NNN Industrial property. In doing this, the investor was able to maximize their loan dollars and get a 60% loan-to-value on the property. The property was purchased at a 6.0% cap rate but only had two years of remaining term. Therefore, the lender held back one year of principle and interest until the tenant renewed at replacement rent of the final year term.

Results

The renewal was successful (rate bumped by $.10 PSF), unlocking the holdback from the lender, and in doing this, the investor’s cap rate bumped 75 basis points, and their net cash flows were three times their original multifamily property.