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Generally speaking, would advise to steer clear. In DC, they own a portfolio of 2nd generation Class A- office assets grouped in a very small neighborhood across the river from DC (Rosslyn).
My advice to steer clear stems from their continued inability to dig themselves out of one of the worst institutional real estate investing decisions since the financial crisis. Monday elected to build spec on a 500,000+ SF office building with top of the market rents in Rosslyn, a high vacancy market (still 20%+) that got absolutely torched by BRAC and other budget cuts that destroyed the contractor tenant mark in NOVA. Somehow, that investment decision was approved, and they ended building a very nice building. They never secured a pre-lease. After delivery (and continuing to shoulder massive carry costs), they repeatedly got looks at but failed to close the 4-5 biggest office tenants in the market because they were too greedy on rents. Rumor has it they gave the keys back to the bank this past week.
Wow. I can kind of understand developer hubris, but what lender was financing spec office construction (let alone at that scale) between 2010-2013?
The way I think the deal evolved is that Monday (backed by Goldman who bought a majority stake in their VA portfolio after Lehman went under) built a significant portion of the project with equity and did not lock down financing until they were above grade. Maybe the fact that the LTC proceeds were low and the risks of hitting nasty unforeseen construction conditions typical when digging made them more comfortable. And, we don't really have any detail on recourse provisions, pledged collateral, etc. Even with all that information it still seems nuts.
I believe they were pretty good at making the worst decisions pre-crisis as well. It wasn't a newly learned skill
Ballpark, what do you envision the development cost was on the project? Couldn't be more than $400psf?
$400psf x 581,000 SF = $232MM total dev cost. Not sure how much equity they had in the deal, but they refinanced their construction loan in 2013 with $200MM in lifeco money.
I've spoken with them two different times and they're incredibly nice people, but like Ricky Rosay says, they built the tallest building in Rosslyn spec, completed it in 2013, and it has never had a tenant.
https://ggwash.org/view/42261/this-building-is-very-tall-and-very-vacant</a">Link
If one were to build a 12 story 300k sqft class A/B office building, what percentage would generally need to be pre-leased in order to obtain construction financing?
The answer to that question depends on a lot of factors, with some of the more important ones being % of recourse the borrower is willing to accept, credit profile of lead tenant, vacancy in that specific market, quality and location of asset relative to competition.
We just did a construction loan in a very well-regarded submarket and were only able to get 50-55% LTC proceeds with a 30% prelease. You can get a construction loan with less pre-leased, you will just get quoted less proceeds and a higher spread (320 bps+). I would say 40-50% is a "magic number" for competitive terms and limited recourse provisions.
Interesting. Thank you.
Yeah it's weird how lenders will finance spec industrial all day long but you have to have preleasing for office.
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