Management of Fallbrook Office Plaza commenced in 2002 after being purchased by our client. The property had been held by the previous owners for the prior 20 years, and there was significant deferred maintenance upon close of escrow.
Financial Challenges: Our client purchased the property by assuming the existing loan, which included terms that were no longer competitive for the present market. Nevertheless, the loan was a conduit loan with a major lender, and our client would be forced to pay substantial prepayment penalties, including defeasance, in order to refinance.
Occupancy Challenges: The first order of business was to determine the best way to increase the revenues of the building. While poor occupancy was only part of the challenge, the other major issue was the caliber of the overall tenant base. The tenancy was not comprised of tenants who could withstand a dramatic rent increase. And, should they vacate, the building was not appealing enough in its present condition to attract qualified tenants at higher rates.
Along with property management services, LBPM was contracted to provide consulting services so our client could refinance the property at a competitive low market interest rate.
LBPM embarked upon a refurbishment project designed to enhance the character of the property and to improve the caliber of prospective tenants we could bring to the building.
With an extensive history in refurbishment and new construction, LBPM assembled a team of trusted professionals for the project, including an architect, general contractor, commercial designer, and landscape architect. The scope of the project included:
- “Re-skinning” the exterior of the building
- Replacing aged panels with colored stucco
- Adding architectural elements to enhance the entrance to the property
- Re-landscaping the exterior of the property including new hardscape elements leading to the entrance
- Complete refurbishment of the building lobby and common areas.
The project took only four months to complete, and normal operations continued at the property throughout the refurbishment process. The existing tenants of the building endured the inconvenience of construction, recognizing that they would be the initial beneficiaries of our efforts.
It soon became evident that their existing lease rate was a relative bargain compared to the improved quality of the building. This enabled us to approach tenants with confidence as their leases came up for renewal, allowing us to structure increases that would not have previously been achievable. And, for new tenants to the building, we were able to achieve starting rates 25% to 30% above the pre-refurbishment average.
Over the ensuing 24 months, LBPM was able to increase the gross scheduled income for the property by 28%. By the spring of 2005, our client was able to refinance the assumed loan at over 300 basis points below their prior interest rate – the combined effect of a substantially reduced interest rate and the 28% increase in gross scheduled income resulted in a new loan sufficient to pay all defeasance, prepayment penalties and costs.
Our client was thereafter able to enjoy substantial and consistent cash flow with a stabilized tenancy and a low interest loan.
Today, LBPM continues to manage the Fallbrook Office Plaza, which boasts occupancy and collectability of over 95% in a market that has been plagued by persistent 20% vacancy rates and collection loss.
The refurbishment and subsequent re-tenanting of the property enabled our client to position the property to withstand the downturn of the 2008 financial crisis, and to remain a compelling choice for a new breed of office tenant that was borne out of the crisis and our recovering economy.