Carolina Tech HQ, DST

Fort Mill, South Carolina

ASSET CLASS:  Class A Technology HQ Office
OFFERING SIZE:  $19,264,000
MINIMUM INVESTMENT:  $100,000
LEVERAGE:  56.82%
SQUARE FEET:  151,503
YEAR BUILT:  2017
HOLD PERIOD:  7-10 Years
TARGETED YR.-1 RETURN:  6.25%

CompuCom recently relocated its corporate headquarters to this modern, Class A office building. The facility’s state-of-the-art design and features provide a showcase for clients and helps CompuCom hire talented IT professionals. The triple net lease features nearly 14 years of remaining term with 2.0% annual rental increases starting in 2020. The local Fort Mill submarket has been a popular destination for corporate relocations due to excellent South Carolina incentive packages, access to downtown Charlotte and excellent quality of life.

Strengths/Risks & Mitigants

The breakeven exit cap rate is 86 basis points above the sponsors purchase cap allowing for cap rate expansion during the holding period. The third-party purchase price capitalization rate appears appropriate when compared to the national investment marketplace and comparable sales. The net load on investor equity is above the range on similarly structured offerings as a direct result of the additional equity raised in order to buydown the interest rate on the Loan

The current capital market conditions favor in-place net leases which have greater than ten years of lease term remaining and typically offer a premium for leases with 15 or 20 years remaining on the term. A potential purchaser of the Project may discount the value of the Project based upon the impending Lease expiration. Although we have not forecast such a discount to residual value given the difficulty forecasting what, if any impact the shorter in-place Lease duration will have, the Investors should recognize that they are buying under optimal conditions (i.e. optimal conditions for the Seller), however, may not be selling under optimal conditions.

The location of the property is in Fort Mill, a suburb of Charlotte, North Carolina, which was chosen to be closer to clients and a growing pool of IT specialists.  2.4 million people in the 10-county Charlotte MSA. Located in the middle of the eastern seaboard, Charlotte is accessible to 60% of the U.S. population within two hours by plane. Diverse economy that is home to the headquarters of seven Fortune 500 companies. First in millennial population growth between 2005 and 2015. Home to endless amenities and activities, including the NFL, NBA, NASCAR, minor league baseball, U.S. National Whitewater Center, and museums.

The Project is located in Fort Mill, Lancaster County, North Carolina, a suburban location within the Charlotte-Concord-Gastonia, North Carolina metropolitan statistical area (the “MSA”). The Charlotte MSA is located in south-central North Carolina and north-central South Carolina, in the region known as the Central Piedmont, and covers approximately 3,200 square miles. The Charlotte MSA spans two states and is made up of seven counties in North Carolina including: Mecklenburg (home of the city of Charlotte) Cabarrus, Gaston, Iredell, Lincoln, Rowan and Union and three counties in South Carolina including Chester, Lancaster and York. Charlotte is the nation’s third largest banking center behind New York and San Francisco and has become a major business center, claiming the headquarters for seven Fortune 500 firms. According to the US Census Bureau, the MSA had a 2017 estimated population of 2,525,305, up approximately 1.88% per year over the 2010 census level of 2,217,012.

The unemployment rate within Charlotte, North Carolina MSA was 3.2% as of October of 2018. The unemployment rate within the metro was below the State of North Carolina unemployment rate of 3.6% (last reported in October 2018) and the national unemployment rate of 3.7%, last reported as of November 2018.

Prior Syndications: 99
Market Share: 6%
Total Transaction Volume: $1.3 Billion
Properties Currently Managed: 93
Founded 2012
Assets Under Management: $277.5 Million
Full Cycle Multifamily Offerings: 6
Hold Period (Years): 4.4
Average Return of Equity: 132.85%
Average Distribution: 6.58%
Average Equity Multiple: 1.62x

CompuCom Systems, Inc. is a wholly owned subsidiary of Office Depot, Inc. (NASDAQ: ODP). CompuCom Systems, Inc., provides end-to-end managed services, technology and consulting to enable the digital workplace for enterprise, midsize and small businesses. Celebrating its 30th year, CompuCom offers clients individualized experiences, drives workplace collaboration and productivity, and delivers operational performance and efficiency. CompuCom has over 30 years of experience partnering with diverse businesses across multiple industries and is a recognized leader by Gartner.

Office Depot, together with its subsidiaries, provides various products and services. It operates in three divisions: Retail, Business Solutions, and CompuCom. The Retail division operates retail stores, which offer: office supplies; technology products and solutions; business machines and related supplies; print, cleaning, breakroom, and facilities products; and office furniture in the United States, Puerto Rico, and the U.S. Virgin Islands. Its stores also provide printing, reproduction, mailing, and shipping services. As of December 31, 2017, this division operated 1,378 office supply stores. The Business Solutions division sells office supply products and services through sales forces, catalogs, and telesales, as well as through Internet sites in the United States, Puerto Rico, U.S. Virgin Islands, and Canada. The CompuCom division sells IT outsourcing services and products in the United States, Canada, and Costa Rica. It offers a range of solutions, including end user computing, data center management, service desk, network infrastructure, and IT workforce solutions. This division serves its customers through IT service and sales representatives and telesales, as well as Internet sites. The company offers its products under various labels, including Office Depot, OfficeMax, Foray, Ativa, TUL, Realspace, WorkPro, Brenton Studio, Highmark, and Grand & Toy. Office Depot, Inc. was founded in 1986 and is headquartered in Boca Raton, Florida.

Office Depot had revenues for the fiscal year 2017 of $10.2 billion, down 7.6% over the 2016 fiscal year revenues of $11.02 billion. Net income for 2017 was $181 million, approximately 1/3 of the 2016 net income of $529 million. Results for the first nine months of 2018 indicate mixed results. Office Depot posted total revenues of $7.07 billion, up slightly over the same period in 2017. Net income was $118 million, down 49% over the first nine months of 2017. As of September 30, 2018, Office Depot had total assets of $6.47 billion, total liabilities of $4.275 billion and total equity of $2.2 billion. As of the date of this opinion Office Depot has a corporate credit rating of B by S&P with an outlook of “negative”, and a credit rating of B1 by Moody’s with an outlook of “positive”.

The Tenant is a subsidiary entity of Office Depot. Investors should note the financial statements for the Tenant were not made available as a part of our due diligence materials. Thus, we are unable to opine on the financial condition of the Tenant entity, nor its ability to meet the minimum lease obligations indicated within the Lease.

1st-Year Cash-on-Cash: 6.25%
Projected Cash Range: 5.50% - 6.90%
Projected Cash Average: 6.14%

All-In Price: $44,614,000
Purchase Price: $39,000,000
Appraised Value: $39,150,000
Loan Amount: $25,340,000
Equity Raise: $19,264,000
Reserves: $579,929
Reserves to All-In Price: 1.30%
Net Load: $5,034,071
Net load to Equity: 26.13%
Net Load to All-In Ratio: 11.28%
Appraised Net Load: $4,844,071
Appraised Net Load to Equity: 25.35%
Appraised Net Load to All-In Price: 10.95%
All-In $/Ft.: $294.48
Sponsor Profit: 5.36%

Net Operating Income: $2,679,720
Purchase Cap Rate: 6.87%
All-In Cap Rate: 6.01%
Cap Rate Spread: 86 bps
Breakeven Exit Cap: 7.54%
Breakeven Exit Cap Rate Spread: 67 bps
Appraised Cap: 6.84%
Appraised Cap Rate Spread: 70 bps

Loan Amount: $25,340,000
Term: 10 Years Fixed
Interest Only Period: 3 Years
Amortization Period: 30 Years
Interest Rate: 5.06%
Prepayment: 1%
Lender: Cantor Commercial Real Estate Lending
LTV: 56.82%
Non-Recourse: Yes

The interest rate on the Loan has been reduced by 48 basis points through a buy-down agreement with the Lender, which the Investors will fund. The Sponsor believes that the aforementioned interest rate buydown is accretive to the Investors’ return by increasing annual Investor cash flow over the holding period.

DST Due Diligence & Advisory Services

(415) 336-9225

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Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC, and the issuer are not affiliated.