SMARTCAP Bellevue Terrace Office Park LLC

Bellevue Terrace is a value-add Class B office building in suburban Bellevue.


SMARTCAP Bellevue Terrace Office Park LLC

Bellevue Terrace is a value-add Class B office building in suburban Bellevue.

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Targeted Investor IRR: 18.5%
Targeted Equity Multiple: 1.8x
Targeted Stabilized Cash Yield: 6.0%
Targeted Investment Period: 3-5 years
Minimum Investment: $25,000
Property Type: Office
Investment Profile: Value-Add
Distribution Commencement: October 1, 2022
Offers Due: October 20, 2021
Funds Due: October 20, 2021
Targeted Project Level IRR: 22%
Sponsor Co-Investment: 1%




Investment Summary


Investment & Returns


Business Plan


Opportunity

Bellevue Terrace is an exceptionally well-located suburban office property in one of the strongest office markets in the United States. SMARTCAP will lease up the remaining vacancy, mark rents to market upon roll (and convert the remaining full service gross leases to triple net), upgrade the amenities, and take advantage of the unique supply and demand dynamics in Bellevue, WA.

Vacant Suite

The remaining vacancy has a flexible layout which will enable SMARTCAP to either lease the suite to one tenant or demise into two or three smaller suites, which will expand our pool of potential tenants. Our marketing strategy will be to highlight the easy access to 405 and I-90, proximity to the soon-to-be completed Mountains to Sound Greenway Trail and the Eastgate Park and Ride, the views of Bellevue, and most importantly the unique opportunity for freeway visible building signage. There is no other opportunity in the market for a tenant of less than 20,000 square feet to have this type of signage.

Downside Mitigation

While the vacancy rate at the property is high, the weighted average lease term of 6 years offers protection. In the event of a downturn in the market or longer-term COVID impacts than projected, the property will not have a significant vacancy increase in the next 3 to 4 years.

Seller Info

Bellevue Terrace is being sold by Swift Real Estate Partners. Swift is selling because they have reached the end of their targeted 5-year hold period and are closing out a fund. Although the property is not stabilized, they acquired the asset at a low basis in 2016 and will recognize strong returns.


Exit Plan

Hold Period

The expected hold period for Bellevue Terrace is 3 to 4 years. Our initial focus will be stabilizing the asset, addressing the deferred maintenance, and upgrading the amenities. We will then be in the best position to take advantage of market growth to mark the leases to market upon expiration. This will allow us to maximize the value by our targeted exit date of 2024-2025.

CapEx Budget


  • The Mountains to Sound Greenway Trail runs adjacent to the property and the Bellevue leg will connect the property to Seattle by EOY 2021. Improving the onsite showers and adding bike cages will capitalize on this amenity.
  • The ‘make ready’ work on the vacancy will include new carpet and fresh paint, in addition to common area bathroom touch ups on the second floor. This will give tenants a better vision of what the space will look like and can accelerate leasing.
  • A portion of CapEx budget will go towards improving the outdoor porch amenity to improve the experience of tenant events. This will include building a BBQ nook.

Construction Pipeline


  • Almost seven million square feet of office is currently under construction in Bellevue. Incredibly, only 4 other markets in the country are building more – Manhattan, Los Angeles, San Jose, and Boston. Of these, Boston is the next smallest market to Bellevue and has 5 times the population.
  • Even with all the new construction, Bellevue is currently 91% preleased to Amazon, Facebook, Google, Microsoft, Robinhood, and Costco, eliminating the potential for supply to outpace demand in our market.
  • The “Big Tech” effect on Bellevue is by a wide margin the most impactful driver of growth in the submarket
Eastside Office Projects:

Comparables


  • Four multi-tenanted suburban office assets have sold on the Eastside in the last year. Overlake 520 was the first to transact post-COVID, and the buyers received a discount in cap rate for being the first asset to transact in a post- COVID world. Over the last 10 months, cap rates have compressed and prices per square foot have increased as investors become more comfortable with the Eastside investment thesis.
  • Lincoln Plaza is currently under contract at around $86MM. While this property is better located and has a higher occupancy, it is a strong comparable property and clearly shows the value in the market.
  • The pressure of high rates, expensive parking, and congestion in downtown Bellevue will continue to drive tenants out of the Bellevue CBD. The I-90 and 520 corridor submarkets benefit from this by being the closest secondary markets to the CBD.
  • Case Study: Evergreen Office Park is another SMARTCAP owned asset - this property has seen rapid rental growth even through COVID. In January of 2021 asking rental rates were $32.50/SF. Today, we are asking $35.00/SF.
  • A $33.50/SF NNN rental rate is assumed in the Bell Terrace base case underwriting model. This is supported by the comps in the submarket (see slide 19), and the fact that the most recent lease in the building was signed at $33.50/SF (10-year term).

Financial Summary


  • Four different models were created to test the return sensitivity to various market conditions. Downside #1 projects returns with a higher disposition cap rate and lower rental rate, while Downside #2 projects returns based on 18 months of lease up downtime and higher TI’s.
  • Rental rate, cap rate, and lease up costs have the largest impact on returns.
  • In the event of Downside #1 or Downside #2, the property cashflows will still be positive, minimizing the possibility of an additional equity raise in the future.

The purpose of the $1.5MM operating buffer is to finance lease up costs for the vacant suite, budgeted deferred maintenance, and amenity improvements.

70% / 30% Final Splits

  • Table shows a projected return based on SMARTCAP’s assumptions, demonstrating a $100,000 investment. A 4-year hold period is assumed.
  • IRR calculated from initial investment date.

The Team


SMARTCAP is a direct real estate investment firm operating in the Puget Sound area, one of the top real estate markets in the world. Your risk is minimized by acquiring assets at value-add pricing. Our track record for our entire portfolio is over 23% IRR paid to investors, net of fees and expenses.

Investors are our life-blood and appreciate our detailed monthly communication and financial reporting. Your questions are answered quickly and with honesty and transparency. You will receive monthly updates, including detailed property summaries and financial reporting, as well as monthly distributions.