We are going to be looking at an office property in Orange County, CA. This is a value add suburban office building in Lake Forest. The building appears to be vacant. However, an updated rent roll would be ideal for getting more precise underwriting. We will be highlighting how units can be easily added to Investart and get your investment analysis started.
For this analysis, we use the purchase price provided and $2.38/SF/Mo gross rents for our market leasing assumptions. This is in line with the comps in the area. The Unlevered IRR is 7.31% and a Leveraged IRR of 11.28%. This is with a 5.00% exit cap. This building is assumed to be completely vacant. This is a true value add deal that could also be as an owner/user opportunity. For this investment, it is prudent to look at the stabilized cap rate rather than just simply the cap rate. The stabilized cap rate uses the total investment rather than just the purchase price. This is ideal since there is a pretty substantial amount of investment needed to stabilize this property. You can see in year two, there is a swing of about 44 basis points from a 7.40% cap rate to a 6.98% stabilized cap rate.
On the left, we can see a screen show of how tenants are added to the app. All these fields should look familiar to most real estate investors. Something that I wanted to highlight is how vacant units are added. If you notice in the “In Place Rent” section, the variable is set to vacant rather than say “SF/Mo”. The system will treat this unit as vacant, and then any lease term that is added will be used as additional downtime. This can be useful if the unit is going to need some refurbishment. The rest of the field will not affect the calculation except for MLA, which contains the assumptions for the new lease. Any downtime that is part of the MLA will be added to the downtime added here are part of the “In Place Lease Term” additional downtime feature. For example, if you add 2 months to the In Place Lease Term section and the MLA has a downtime of 3 months, the total downtime for this space will be 5 months. Any subsequent lease rolls will only use the MLA downtime of 3 months.
This Investment is a value add opportunity in every sense of the word. This is a vacant Class B office during a time when the world is still adjusting to post Covid work arrangements. As the world opens back up, this might be a good opportunity to jump in and catch some of the early office momentum.
If I have piqued your interest, take a look at the model for this property. The first link is the full report in PDF form. The second link is the live model already loaded into Investart. You’ll need to sign in to your account and then click the link, and a copy will appear on your account. It is completely free to sign up for an account at Investart. For any questions regarding the property, please contact the listing broker, which can be found in the last link.