Alinea - 2019 Update
Alinea in 2019 consisted of finally executing leases for the entire property and construction getting underway for both tenants. A refinance took place after the execution of the 2nd lease to Pure Barre. The original purchase price for the property was $950,000. After the execution of the second lease to Pure Barre the building was valued at $1,900,000.
Morty's Cafe is a fast-casual american restaurant with hamburgers as it's main offering. The lease for this tenant was executed in Jan 2020 with the following terms:
Term: 10 years
Rent: 26.25 PSF NNN per annum with 3% per annum increases
Size: 2,920 SF
Security Deposit: 6 mos rent
Morty's began construction after executing it's lease in January 2019. Unfortunately the owner has tried to do a lot of the work himself and has been unacceptably slow in the construction of the space. The tenant has been on and off with paying rent on time and being months late. We have been very patient with the tenant because having the tenant in place was important to the acquisition financing and the refinance that took place later in 2019. Through the end of December the tenant has paid 12 months of rent (although often delayed) and the first 3% rent increase occurred on Jan 1 2020. The tenant still has not finished construction, although finally seems to understand that he needs to stop trying to self-perform and is going to use the same GC we used for Pure Barre to finish his construction. The hope is that he will open in February / March of 2020. However, we are now charging a 5% penalty every time the tenant is late and if the tenant is more than 5-days late we will put the tenant in default on the lease. We will be allowing the tenant to reach their opening provided they can show they have sufficient funds to finish construction and open. In the event the tenant is not able to perform we will takeover the space and either re-lease the partially completed space or look to open another business in the space.
Throughout 2019, from January to July 2019, we spent marketing the second retail space at Alinea and had two executed LOIs and spent a couple months negotiating leases to have them fall-apart in the 11th hour of negotiations.
The initial potential tenant was a craft beer concept that we had an executed LOI at $26 PSF NNN per annum with a 7-year term and 2 months of free rent. After a couple months of lease negotiation the tenant pulled out of negotiations. The next tenant was a Japanese/Korean restaurant concept where we also executed an LOI and were in lease negotiations for a 7-year deal at $26.50 PSF NNN lease with 4-months of free rent and a $20 PSF TI allowance. In a similar fashion after LOI execution and months of lease negotiation the tenant pulled out due to not being able to get enough seating and their build-out costs looking too expensive for the size of the space. Ultimately, after two failed deals, Neal decided to explore finding a business concept that he and Kyong could own and operate. Ultimately the decision was made to open a Pure Barre (a Barre group-fitness studio) in the 1,600 SF retail space in Alinea that has sat vacant since construction completion in late 2018.
The Pure Barre franchise owned by Neal, Kyong and Derek executed a lease in September 2019 with the following terms:
Term: 10 years + 10 year option
Rent: $26 PSF NNN per annum with 2% per annum increases
Size: 1,610 SF
TI Allowance: $20 PSF
Pure Barre has completed construction and will open it's doors during the second week of January 2020.
The execution of the Pure Barre lease made Alinea a fully leased property. The subsequent valuation after the Pure Barre lease for the property was $1.9 million in Oct 2019. The increase in valuation allowed for First Utah Bank to amend the loan and increase the loan proceeds by another $410,000 with a variable rate that is 750 bps over Prime (5.5% interest rate at loan closing). The now $1,360,000 loan is fully guaranteed by Neal and Derek, which was a key component in getting the loan in place.
Instead of distributing the increased loan proceeds, Urban-C9 will instead loan the proceeds to Pure Barre to fund the build-out of Pure Barre at a 3% interest only rate. This allows Urban-C9 to earn income both through the rent paid by Pure Barre as well as earn increased cash flow through the internal loan.
In 2020, once both Pure Barre and Morty's both open Urban-C9 may refinance the loan again with a longer-term loan and lower fixed-interest rate. Wells Fargo is the targeted lender through the relationship Neal has already established with the local commercial branch.
Pure Barre will be open and operating and Morty's will hopefully open in 1Q 2020 as well. With the property fully tenanted and cash flowing, quarterly distributions from the property will likely begin. Later in 2020 Urban-C9 will consider a refinance of the property for a long-term hold or a potential sale of the property.