Tuesday, November 06, 2012

The Acquisition

Non-traded real estate investment trusts buy and sell (mostly buy) properites every day, and no one transaction seems more memorable than any other.  But then in the summer of 2010 Cole Credit Property Trust III (CCPT III) purchased a $310 million office building, and it instantly became an acquisition everyone was talking about.  The building, located in a suburb of Seattle, was over 95% leased to Microsoft, and I know it as the Microsoft Property.  Cole has been justifying the acquisition of the Microsoft Property ever since.

Other non-traded REIT sponsors whispered that they too had reviewed the property, but had passed on it because it was too expensive, giving a strong implication that Cole overpaid.  Cole was accused of style drift - what else could it be if a retail-oriented REIT spent so much money on a single office property?  You must be ever-vigilant for the horror of style drift in the strict, stratified world of non-traded REITs. 

CCPT III has sold the most infamous property in recent non-traded REIT history, giving Cole some justification and vindication.  The Microsoft Property, which was purchased for $310 million, was sold for $375 million.  Cole's spite at the industry seeped into its press release (emphasis added):
“When our experienced real estate team brought this opportunity to us in the summer of 2010, despite industry naysayers, we felt this acquisition would be an excellent fit for our growing portfolio of mission-critical corporate properties,” said Marc Nemer, Cole’s president and chief executive officer. “Today, not only have we seen a 21% increase in the property's value, but we were able to deliver a return of 38% on the equity invested, creating significant value in the portfolio for the benefit of our shareholders.”
Now that the Microsoft Property has been sold, the industry can focus its full attention on the ever-pending liquidity options for Cole Credit Property Trust II.

On a serious note, CCPT III paid a pre-payment penalty of $12.8 million as part of the Microsoft Property sale. The property had a $156 million mortgage that was repaid at closing. I figure the pre-payment penalty was 8.2% of the outstanding balance on the mortgage. Is is me or does this seem like a high percentage?

1 comment:

Debt Guy said...

Regarding the prepayment, it was probably a Yield Maintenance Premium or Defeasanse Premium (in the case of a CMBS loan). It's unlikely a lender would put an 8.2% prepayment penalty in the loan documents.

You would have to look at the original terms of the document and then try to back into the $12M number.