ValueXpress has arranged a $28-million CMBS conduit loan secured by a portfolio of eight office buildings that are specifically designed and leased as office suites. The transaction is by far the largest office suite transaction completed since the restart of the CMBS conduit loan market in 2010. The properties are located in Indianapolis, Indiana, and the Dallas, Texas, suburb of Frisco. The properties were 100% occupied at closing and are owned by the Yeager Company.
The transaction was unique in that the buildings were designed specifically to be leased as small office suites. The average size of each office suite is 180 square feet (sf; 12 feet x 15 feet). All the buildings combined contain more than 700 tenants. These tenants share common amenities, including conference rooms, break rooms, office equipment, high-speed internet service and reception.
The transaction was challenging in that the lease term for tenants is month-to-month. The rating agencies had great concern regarding the stability (or instability) that month-to-month tenancy can have on the property revenue. The initial treatment by the rating agencies for rating purposes was similar to hospitality. This treatment is harsh (lease term = one night), so the rating agencies visited the sponsor to learn about the office suite concept. As a result, they viewed it more like self-storage, which has month-to-month leases and better rating treatment.
Additionally, the rents in office suite buildings appear high when viewed on a per-square-foot basis. The annual rent across the portfolio is $37.25 per sf, much higher than the typical $20-$25 per sf for traditional office space. But when looked at from a monthly rent/unit approach like apartments, the average rent/unit is a very reasonable $625 per month. We were able to secure rental comparisons from other office suite buildings for appraisal purposes and did not have to mark down rents for valuation purposes.