Purchased Institutional Interests in 1998 for $18.5 Million,
Sold in 2005 for $41.9 Million

Developed by Moore&Associates, this high-rise office building is situated in Silver Spring's Central Business District. In 1998, Moore&Associates purchased the institutional interests based upon a value of $18.5 million. Although institutions were generally divesting of commercial real estate at the time, Moore&Associates projected that the building could be managed and leased to "bridge" to healthier times for the industry. The property had the following attributes at acquisition:

• Going-in price of $116 per square foot;
• Sixty percent (60%) of the building was leased to AT&T, who had vacated and sublet their space at below market rents to non-credit tenants;
• Large capital requirements were anticipated to reposition the building and multi-tenant the AT&T space at their lease expiration, which was in three years;
• Rent from a below-grade level (13% of the building) was insufficient to cover its operating costs, thus depressing the property's value; and,
• Although the asset was in an irreplaceable location adjacent to Silver Spring's Metrorail Station, the sub-market was exhibiting weak demand with no improvement anticipated for 3 to 5 years; and,

Moore&Associates' Investment Strategy was to (1) acquire the property below replacement costs; (2) procure a flexible interim debt/equity structure to facilitate a future re-capitalization; (3) gain control of the AT&T space, re-tenant, stagger lease expirations and minimize re-tenanting capital investments; (4) convert below-grade level to a use that will generate cash flow and add value to the property; (5) refinance when tenant base is stabilized, and (6) exit at such time as an attractive disposition window opens. A five to seven year hold was anticipated. The property was expected to be highly appealing to an institutional core investor upon stabilization.

Implementation: Moore&Associates procured 100% flexible-exit financing to acquire the asset. Control of the AT&T space was achieved by negotiating an early staggered buy-out option that allowed the landlord to terminate all or any portion of the premises and receive the present value of future rent payments less subtenant rents. Subtenant leases were restructured as direct transactions, lease expirations were staggered, and the AT&T lease termination payments were used to fund lease transaction costs. Moore&Associates procured a change-in-use variance and leased the below-grade level to a university for educational purposes at full market rents.

Within four years the AT&T space had been re-tenanted without the need for additional capital, which facilitated a recapitalization that occurred in 2002. The property was appraised at $27 million at that time, an increase in value of $8.5 million. The recapitalization generated $3 million in Excess Development Funds (a tax-deferred event).

Performance: Moore&Associates generated significant cash flow in 2003, 2004 and 2005. In 2005, the firm sold the asset to an institutional investor as a core holding for $41.9 million, an increase in value of $23.4 million over the seven year hold period.