Falcon Closes Purchase of Two Single-Tenant Properties
In July, 2002, Falcon Real Estate completed the purchase of two single-tenant properties on behalf of its clients. The first of these was the Cox Communications Building in Herndon, Virginia at the entrance to Dulles International Airport. Falcon represented a group of overseas and U.S. investors in the purchase of this property, and will also act as asset manager during the projected five-year holding period. The property is a newly constructed two-story building of 94,170 square feet (8,760 square meters) situated on a 6.95 acre site. Herndon is one of the more rapidly growing suburban communities in Fairfax County, Virginia, just outside Washington, D.C.
Cox Communications is majority-owned by Cox Enterprises, Inc., and operates one of the largest cable television systems in the United States. The company has 6.2 million subscribers, making it the fifth largest cable television operator. Cox is rated BBB (investment grade) by Standard and Poor’s. Cox entered into a 15-year absolute net lease that commenced in May 2002. There is a 14% rental increase at the end of the fifth year of the lease term. Cox is responsible for all operating expenses, real estate taxes, and insurance as well as the structure of the property.
The purchase price for the property was $20.2 million, representing a going-in capitalization rate of 8.5%. John Hancock Insurance Company provided a first mortgage of $14,150,000, equal to 70% of the purchase price. This was an interest-only, five-year mortgage with an interest rate of 6.58%. As a result of this financing, the investors will receive a cash-on-cash return of 10.2% annually during the projected holding period.
The second property that Falcon purchased recently was the Siemens Westinghouse Office Building in Orlando, Florida. Falcon represented an institutional investor from Geneva, Switzerland in this transaction. This property is an attractive, newly-constructed, office building consisting of a total of 226,548 rentable square feet (21,055 square meters). The property is 100% net leased for ten years by Siemens Westinghouse Power Corporation, which is indirectly owned by Siemens AG. Siemens AG is an international conglomerate based in Frankfurt, Germany with worldwide sales of over $73 billion.
Siemens has leased 100% of the building with a lease term of 10 years expiring on June 30, 2011. They are paying $13.03 per square foot, triple-net with an increase in base rent in the 5th year of 10%. The lease is structured as a triple net lease in which the tenant is solely responsible for the operation of the building and payment of all operating expenses, including real estate taxes, all appropriate insurance, roof maintenance and building systems and any additional capital improvements. The lease is fully guaranteed by Siemens Corporation (USA), which is the American subsidiary of Siemens AG.
The property is located in one of Orlando’s fastest growing sub-markets near the University of Central Florida and the prestigious Central Florida Research Park (CFRP), one of the top science parks in the United States. This location offers excellent access to the Orlando International Airport, Orlando’s Central Business District, and major shopping centers through a very good transportation network consisting of the recently completed beltways of Orlando’s interstate expressway system.
This property was purchased at a price of $35,755,000 ($158 per square foot) representing an 8.3% capitalization rate based on the first year’s net operating income. A $25 million mortgage was provided by Credit Suisse First Boston. This is a five-year mortgage on an interest only basis with an interest rate of 6.23%. The cash-on-cash yield to the investors was 10.8%.
Howard Hallengren, Chairman of Falcon Real Estate, commented that properties such as Cox Communications and Siemens Westinghouse are in great demand by investors today. “With confidence in the stock market having eroded significantly, and with yields in the bond market at very unattractive levels, investors are seeking investments with higher yields and greater security. Investments such as Cox and Siemens provide both higher cash-on-cash returns and a relatively high level of security. Our clients continue to look for other transactions similar to these.”