In September 2016, Virtua Partners (“Virtua”) launched an offering for a recapitalization of a 605,392 square-foot Class A office campus in Windsor, Connecticut. Virtua’s business plan for the property included a new bridge loan refinancing and equity capitalization, improving property operations, funding of tenant improvement reserves, completion of capital improvement projects, increased occupancy, and infusion of additional capital to fund future leases. The in-place tenants had expressed a desire to expand or extend their leases, but the property and current owners did not have sufficient and necessary cash reserves to fund tenant improvements and leasing commissions, which Virtua expected to be able to provide as a result of the recapitalization. The property’s occupancy was projected to quickly increase to 93% during the first year.
On April 30th 2020, GE vacated their space, bringing occupancy from 96.8% to 59.5% and resulting in more than two-fold decrease in monthly rental income. The new lender’s appraised value came in lower than expected, requiring $5MM of new equity. Ultimately, the loan closing was cancelled due to COVID-19 related economic concerns. Virtua determined that a capital call option was unlikely (would have to be structured as unsecured notes to the property and require full subscription to proceed) and that instead it was in the best interest of investors to convey all equity interests in the property to MacKenzie REIT, in exchange for OP units that could be converted to REIT shares. The REIT would fund the mortgage loan and future operating expenses, including required tenant improvements and broker commissions to re-lease vacant space. The transaction would avoid risk of foreclosure or any need for additional investor capital, and ensure a return to investors. On June 8, 2020, MacKenzie formed an operating partnership (OP) and entered into and closed on a contribution agreement with Virtua and the various LLCs related to the property. In connection with the contribution agreement, OP units were issued and sold at a value of $10.25 per OP Unit. As of this date, CrowdStreet has deemed this offering as realized at the price of $10.25 per OP unit received by investors.
Significant Leasing Update
In Q3 2018, Virtua informed investors that as of July 20th, GE, the largest tenant occupying approximately 225,000 square feet, had vacated/surrendered approximately 72,000 square feet located on the north side of the building. However, GE would continue to pay rent and was contractually required to do so through April 2020. Property management was already touring the space to a number of prospective tenants.
Upcoming Loan Maturity
As of Q3 2019, property management was continuing to focus on leasing activities and property improvements to backfill the vacating GE space. With the senior loan maturing in November 2019, a forbearance/short-term extension agreement was put in place permitting the senior loan to be repaid on or before March 2020. Virtua had identified a new lender for the refinancing and was projecting to close on the new loan in February 2020.
Virtua was not successful in finding a new tenant to backfill the large space being vacacted by GE. Furthermore, the actual vacate coincided with unfavorable market conditions related to COVID-19, making it difficult for Virtua to restructure the investment. All equity interests in the property were ultimately conveyed to a REIT, resulting in a deemed partial capital loss for investors.
*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.
This report contains explanations of a series of events associated with the Addison Corporate Center offering that resulted in an approximate -29.1% (net of most onerous fees) IRR 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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