Baywood - 2019 Update
Baywood in 2019, was the year the major re-positioning finished. From the design and planning process (18 months) to the finish of construction (18 months) the project was a 3 year time frame. The end result is a very well-received stabilized asset worth $33 to $35 million, with $22.5 million in debt, that is 100% owned by Fremont Village after the Fong buy-out in 2019.
Construction activity in 2019 included the completion of the facade renovation and 3rd floor addition, addition of a new roof membrane, completion of the rear alley landscape project and the addition of a world-class mural. The total project costs were $7.8 million including construction, design and entitlement costs.
The rear alley landscape project and Baywood mural put the finishing touches on the project. The landscape project adds private patio spaces for both Baywood and Railroad as well as outdoor bike parking and another world-class mural on the Railroad building.
At the end of construction the project could have been sold and the proceeds split 50/50 with our partner Fong. Instead, the decision was made to buy out Fong's share when it was determined that he was interested in doing so. Negotiations and deal structuring took place in 1Q 2019 and the buyout was completed in 3Q 2019. Fong's 50% share was purchased for $6.8 million ($5.35 million in cash and $1.45 million in a 2-year note at 5% per annum). The $6.8 million purchase of Fong's share valued the property at $28.6 million. Today the property is worth $33 to $35 million, which means the additional $5 to $7 million in appreciation is 100% captured by our ownership interest. If the property were to be sold today for $34 million we would net approximately $11.1 million in cash pre-tax.
Fong has received $5.35 million in cash and currently carries a $1.45 million note that will be due in 3Q 2021. The buy-out structure was designed for Fong to be able to defer his tax obligation and not create a major taxable event for Fremont Village either.
At this point the plan is to use excess annual cash flow to pay for the interest expense and in 2021 either use liquidity available to pay the $1.45 million or sell a 20% minority stake in the property for $2.5 million or $3 million. The sale of the minority interest in Baywood will also likely be coupled with an equity partnership on Railroad to build a 12,000 SF office building on that site.
In 2019 a long-term loan was put in place with Citi to take out the then existing $15 million short-term with JP Morgan. The debt negotiations started in late 2018 and funding occurred in 1Q 2019. The loan terms are a 10-year loan at 4.95% interest only for $21 million. The proceeds from this loan were used to payoff the existing debt at to provide Fong with $5 million in cash at closing. This loan allowed us to maximize proceeds and keep annual debt costs low. The CMBS structure is set up so if there is a major tenant turnover (i.e. Fossil) that the lender will sweep all cash flow produced by the property to cover interest costs and create a reserve. This means that in 2024 or 2025 if Fossil does not exercise it's option then there will be no cash flow to distribute from the property until a new tenant moves in. NY has signed a guarantee for the bank for any fraudulent activity, that would make NY responsible for the $21 million loan should the bank determine fraudulent misconduct occured.
In 2019 cash flow distributions from the property have started to occur. The Baywood asset currently produces about $50,000 in net cash flow every month.
The property is currently 100% occupied. Fossil Group occupies the 2nd and 3rd floor, Second Measure occupies the first floor office space and Core Power Yoga occupies the ground floor retail spaces. All tenants have more than 5 years left on their leases.
In 4Q 2019, Second Measure physically moved out of their space, but are still paying rent. Second Measure completed renovation of another building in Downtown San Mateo and have consolidated into that building. They are trying to sub-lease for a couple years until their company growth warrants occupying both buildings. At this point, there is no insight given from the tenant as to any other plans. Currently NY is not concerned as rent is being paid on time and Second Measure is still liable for the lease.
No major repairs are forecasted for 2020 and no major tenant rollover is planned. The Second Measure is a situation to monitor for, but so far there is nothing actionable around their situation. 2020 should see consistent cash flow distribution, but as much cash flow that can be allocated towards a reserve account should be allocated for the upcoming payoff of the Fong $1.45 million loan. Towards the end of 2020 / early 2021, the bank will start to sweep some cash for cash flow reserves... approximately a few thousand a month.