In June 2018, Ridgeline Capital Partners (“Ridgeline”) launched their offering for a 21,316 square foot, Class A medical office building located in Allen, Texas. The property was 93% occupied with seven tenants and an average weighted lease term of 5.5 years. However, those tenants had below-market rents.
Ridgeline acquired the property in July of 2018. The business plan was to increase the occupancy to 100% and increase the below-market rents as the lease terms ended, then sell in year eight with a refinancing occurring in year five. Ridgeline projected 100% occupancy at closing due to a pending letter of intent with a tenant to fill the remaining vacancy.
Closing and First Year of Operations
Ridgeline was able to finalize the lease with a tenant prior to closing that increased the occupancy of the property to 100% at closing. As of the end of 2018, the total monthly gross rent collected was $32,123.35. In 2019, two tenants (14.5% of the building) decided to move out or not renew. The loss in tenants reduced the monthly rent to $27,998.38. Ridgeline was aggressively marketing the vacant spaces for lease but was unable to secure replacement tenants prior to the end of 2019.
All Tenants Current on Rent
Due to the COVID-19 pandemic, two of Ridgeline’s tenants were impacted and could not pay rent in April 2020. Ridgeline provided partial rent deferral for each tenant. One tenant agreed to reduce their overall space from 3,480 to 1,677 square feet, increasing the vacancy to 23%, but increased rent on that space from $17 PSF to $18.50 PSF. That tenant also extended their lease term by five years.
All tenants were current on their rent by end of Q2 2020. Before the end of the year, Ridgeline was able to secure a new lease to start in the following quarter for 3,480 square feet reducing the vacancy to 6.7%. The monthly rent at the end of year three was $26,288.30.
In early 2021, the new tenant began its occupancy of the 3,480 square feet space. Ridgeline was also able to secure another lease for 20% of the building, encompassing the remaining vacancy plus an additional 13% that was leased but physically vacant. That lease was expiring in August of 2022 and the tenant did not plan to renew. The new lease extended the weighted average lease term to five years, providing an interesting opportunity to sell and take advantage of a supply-constrained market. Ridgeline was able to secure a buyer who closed in September of 2021.
Successful execution of the business plan coupled with favorable market conditions resulted in 100% occupancy with a five year weighted average lease term (WALT). This scenario presented Ridgeline with an opportunity to exit the investment earlier than planned while locking-in higher-than-projected returns 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 Allen Medical Office offering that resulted in an approximate 18.6% (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.
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