In 2015, we found, a 20,000 SF warehouse/distribution facility, fully-leased to a national, “to the trade” wholesale landscape supply company. The national company had recently purchased the business of the local owner but not the real estate, which the local owner was then looking to sell with a “short-term” lease to the national company in-place. The building is located on Stergis Way, a short dead-end cul-de-sac originally developed as part of a small enclave of six small, mostly owner-occupied industrial buildings just one-half mile from the intersection of Routes 1/I-95, in Dedham, MA. Over the years, most of what had been an active industrial market in this immediate area so close to a major intersection off I-95 has been converted to more retail/service-oriented uses and today Stergis Way sits directly behind Legacy Place, one of New England’s most successful “lifestyle” shopping centers. The location of this building was key to the landscape supply company in that it built its business by providing convenient access to landscapers servicing the nearby wealthy communities along I-95 from Westwood to Weston.

The lease negotiated by the previous owner of the business was not ideal from an investor’s perspective…the tenant could control the space for 9 years through a 3-year lease which included two 3-year options to extend, at lease rates which were contractually set at rates considerably below market.

We saw the situation differently. With a national tenant on board, we liked the credit; the $110/SF purchase price was well below replacement cost; even with below-market rents, we were buying at an estimated “going-in” 8.16% cap rate. We hoped that the tenant wouldn’t renew in three years…we were not afraid of vacancy for several reasons…

• We believed the current rents at the building were at least $2.00/SF under market and there was a strong demand for and very little supply of warehouse/distribution space in the area,
• As a small and vacant warehouse/distribution building, it would be coveted by “user/owners” who would pay $160/SF…a very healthy (45%) appreciation in value over the $110/SF purchase price,
• Right before we purchased the property, it was included in a small area that was “up-zoned” to a “Highway Business” zoning designation which would include retail uses.

…we had several viable options to increase the value of the property if the tenant should not exercise its options to extend. As we saw it, our “worst-case scenario” was that the tenant would stay for 9 years and we would have to wait…and a lot can happen over 9 years.

Considering that the tenant contractually controlled the property for up to 9 years, our business plan assumed ownership for that full duration, with a sale at the end of year 9. Based on projected net income at new, higher market rates, as well as our predictions for cap rates at that time, we projected annualized returns in the mid-teens based on our assumptions over the 9-year hold period. This included the preferred return of 7% paid quarterly which we would be able to pay our equity investors along the way because of how we purchased the property…beginning with an 8.16% unlevered return going in.

Again, we raised equity based on what we believed was the “worst-case scenario”, a conservative position that would at least accomplish what is always our ultimate goal…to generate greater than market returns related to the risk in the deal. That being said, our multi-level analysis of the “what ifs” of the potential situation at the property…early exit of the tenant, change in use, positive market dynamics, as discussed earlier, etc., and how those scenarios could affect value were constantly monitored.

In 2020, five years into our ownership, several factors contributed to our decision to sell…

• The tenant, understanding that this location was their second most profitable in Massachusetts, and that they had only one more 3-year option to extend in their current lease, wanted to secure their future at this location for the long term…this resulted in a lease amendment giving them a 5-year extension, and two, 5-year options to extend and for that accommodation, giving us an opportunity to increase the rent closer to market. This move to a longer term also made the property more marketable to investors.
• In the midst of the COVID-19 pandemic, there was still plenty of money to invest…but with virtually no interest in shutdown office or retail properties, and the accelerated rise of e-commerce, investors coveted industrial/warehouse/distribution properties.
• A historically low interest rate environment allowed investors to compete at historically low cap rates, pushing values to levels never before seen.

With fresh new lease terms and an opportunity to take advantage of unprecedented market dynamics, we sold 60 Stergis Way at a 5.7% cap rate for $3,835,360 ($192/SF), creating an annualized return to our equity investors of 20+% and an equity multiple of ____, significantly surpassing the original pro forma performance of the investment.