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A value-added office investment was pitched in the Jackson, MS market by a local broker who had the listing for some time. The Owners really needed to dissolve their partnership and the property had been owner-managed from the day it was built. The property suffered from deferred-maintenance, mismanagement, and low effective rates. Because the owners were not in the real estate business they were leasing spaces at $2.00 to $3.00/SF below average market rates.
Because the Buyer’s firm is an AMO company, Accredited Management Organization, they knew they could immediately provide active management and create great rapport with the current tenants. The Buyer’s also noted during due diligence the operating expenses were running approximately 15% to 20% too high and property was grossly over assessed by the local taxing authority. Brian E. Estes, Buyer, created an investment offering showing 10-year cash flow projections and presented this to a list of joint venture investors who were looking to invest with a general partner. He was able to secure an out of state investor who put in a sizeable amount of equity and between the two of them, placed 30% of the purchase price and improvements as equity.
The Buyers closed on the property on May 1, 2017, using a local bank for financing. Because of the timing of some lease expirations, the Buyer’s decided to finance the project with a 7- year fixed rate, 15-year amortization. The results were as follows:
The results of this transaction were a win/win all the way around. The going-in cap rate was 10.45%, which will increase to over 11.0% after the reduction in operating expenses occurs. In addition the projected internal rate of return (IRR) is expected to be 22% higher based on the reduction of operating expenses and increase rental rates with existing tenants.