Property

Value-Added Case Study

San Diego R&D Portfolio
San Diego, CA

 

Introduction

The seller was a partnership composed of a real estate operator out of Orange County and a San Francisco based opportunity fund. This partnership acquired the portfolio 36 months prior and had failed to successfully implement their original business plan. As a result, the holding period was eroding the operator’s promote position in the partnership and the opportunity fund had lost patience with its partner’s ability to implement the original vision for the portfolio.

The partnership elected to list the property for sale and given the lack of stability in the rent roll with many pending lease expirations, the portfolio was not ideally positioned for sale to institutional investors.  The seller circumstances and the portfolio’s location created a set of conditions that were ideal for Parallel’s skill set.

San Diego R&D Portfolio

The San Diego R&D Portfolio consists of 15 separate buildings totaling 438,142-square-feet in three developments all located in the Sorrento Mesa submarket of San Diego. Six of the buildings are free-standing, single-tenant, R&D/Office buildings ranging in size from 25,000-46,000 sf. The remaining development is a nine building multi-tenant industrial project. Overall occupancy in the portfolio at acquisition was 75% and there were multiple sizeable leases expiring over the first 18 months of ownership, which required a significant amount of lease negotiation and tenant relocation to minimize tenant loss.

Most of the buildings were constructed in the late 1980s through the mid 1990s and were suffering from a lack of capital commitment by the current ownership group.

Parallel’s VOP and HOOPs Programs

After placing the deal under contract, Parallel quickly recognized that there was an ideal opportunity to shift a number of the existing tenants around within the portfolio to address their individual space requirements. The relocations involved some risk and the ability to tear up shorter-term leases in larger spaces in exchange for longer-term obligations in somewhat smaller spaces elsewhere in the portfolio. In the process of repositioning the existing tenants, several of the single tenant R&D buildings adjacent to the Qualcomm campus in Sorrento Mesa were intentionally left vacant due to Parallel’s knowledge that Qualcomm was in the process of trying to control any office property that became available in close proximity to their massive corporate campus.

Our Performance

Once the individual Value Optimization Plans were implemented and Parallel’s leasing team had worked through the assets over a 15 month holding period, three of the assets were sold to Qualcomm. Three more were sold to net leased investors, and the nine building project was sold to RREEF. The investment generated a whole dollar profit of $22.6M and a deal level leveraged IRR of 94% for the partnership.