In October 2018, ScanlanKemperBard (“SKB”) acquired 110 Atrium, a seven-story, class-A office property located in the affluent neighborhood of Bellevue, Washington.
Originally developed in 1981 and thoroughly repositioned in 2013, the property featured high-quality office space, large floor plates, comprehensive onsite amenities, an above-market parking ratio, and sweeping views of the Cascade and Olympic Mountains, Mt. Rainier, and the Bellevue skyline. Including a signed lease that would commence in the first quarter of 2019, the building was 97% leased at acquisition.
SKB’s business plan contemplated managing the rent roll through upcoming lease expirations, while capitalizing on the extremely landlord-favorable market conditions, additional capital investments into the property–including modernizing the elevators and refurbishing the restrooms–and reducing overhead in the parking garage to drive the growth of net operating income (NOI).
* Net of the most onerous fees charged to clients of CrowdStreet Advisors, LLC, our registered investment advisor subsidiary; an investor’s actual returns on a realized investment may differ. Returns are subject to change as a result of contingency holdback/future residual distributions, if applicable.
** Per the terms of the sale contract, the buyer can make seller representation and warranty claims until December 28, 2021. All property accounts will be reconciled at that time. Assuming no claims are made by the buyer, an additional distribution is expected and projected to increase returns to 17.6% IRR and 1.56x EM.
Year 1 Operations
During the first full year of operations in 2019, the property performed well and SKB began executing the business plan. In the second half of 2019, SKB initiated the major capital improvements at the property, including the modernization of building elevators, bathrooms, extensive sealant repair, and waterproofing of the parking garage. The most significant initiative was the building elevator project, which was scheduled to be completed in mid-2021.
SKB also made progress on the leasing front, with two leases for 63,000 square feet and 36,000 square feet executed during the year. Given the strong asset performance, SKB made regular quarterly distributions throughout the year at an annualized rate of 7.5%, which was in line with original proforma expectations.
Year 2 Operations
During the second full year of operations, SKB experienced COVID-19 driven disruptions to the business plan. By the end of 2020, occupancy decreased to 63%, primarily due to a termination agreement reached with WeWork. On the positive side, WeWork remitted a significant termination payment in Q4, which was transferred to the lender and set aside for use as the third and seventh floors were being released. Certain capital improvement projects also experienced delays, with the elevator project now anticipated to be completed in late 2021. Despite the economic downturn, SKB was able to collect most rent and continued making regular distributions to investors, albeit at a reduced rate in comparison to 2019.
The property continued to generate positive cash flow in 2021 and most planned capital improvements neared completion. Although occupancy remained low throughout the first half of the year at 57%, SKB was beginning to see an uptick in leasing tours as market conditions improved in Bellevue. As such, it engaged a capital markets brokerage team to estimate the property value, and based on the feedback received, SKB concluded that it was in the best interest of investors to sell the asset at this juncture. In Q2 2021, SKB agreed to sell the property in order to eliminate further market risk while still achieving favorable returns for investors.
The sale transaction officially closed in late August 2021.
Although SKB experienced certain COVID-19 related challenges throughout the hold as it executed the business plan, overall favorable market conditions helped SKB successfully exit the investment earlier than planned, achieving favorable returns for investors, including a higher-than-projected IRR.
This report contains explanations of a series of events associated with SKB’s 110 Atrium offering that resulted in an approximate 51%* 1 absolute return on original equity to investors (including those from the CrowdStreet Marketplace). Certain aspects of the report such as dates of major events and the final outcome are easily verifiable while others, particularly underlying reasons behind the sponsor's business plan execution, are not.
The report partially relies upon the sponsor’s explanations, the information contained within sponsor-produced quarterly reports, and conference calls. This analysis is not an assertion of independently verified facts but, rather, is for informational purposes only, to convey CrowdStreet’s understanding of what transpired.
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