Helios Property Management Company
Helios Property Management Company, ("Helios" or the "Sponsor"), is growing their distressed real estate portfolio, with a focus on diversified commercial real estate investments in the Chicago area. The principals' experience includes real estate investment, development, brokerage, leasing, management, maintenance and construction. Helios, and its affiliated companies acquire, lease, manage, value engineer, and sell selected properties. The focus of their team is to increase income (typically through increasing occupancy), strategic building management though extending leases, appropriate financing, and cutting costs through knowledge of the building, mechanical systems and construction.
Helios will undertake the management for the property and institute aggressive operations initiatives in order to right size the expenses at all properties they manage. Vendor contracts from previous ownership will typically be canceled at closing and resigned once competitive analysis is performed. Helios is confident that expenses can be reduced and maintained throughout the ownership of each property. Expense and tax reductions are critical for the economic success of most properties we manage. The end goal, is to maximize income (through occupancy) and decrease expenses - that will result in a higher net operating income and a higher valued property.
Assets Under Management*
*While Helios Property Management Company does not own any of these assets, Chet Balder, the owner and President, owns 100% of Helios Property Management Company and owns an interest in each of the properties through various limited liability companies.
Sponsor Principal Credit History:
One of the principals of the Sponsor, within the last three years, entered into a loan workout with two lenders on his personal residence, and while foreclosure did not occur, each lender did initial a foreclosure action on the property. Both actions were dismissed when the loan workout was completed (including a substantial paydown of the loan principal balance) and the reinstated loan has been paid as agreed. RealtyMogul.com's due diligence included lender reference checks with lenders the Principal has borrowed from over the last several years with RealtyMogul.com receiving what it believes was favorable lender responses on the Sponsor’s payment history as well as his management performance.
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Chet Balder - Owner and President
Mr. Balder is the owner and President of Helios Property Management Company, which was founded by Mr. Balder in 2010. From 2004 to 2010, Mr. Balder previously served as Vice President at Ardmin Properties where his role focused on company acquisitions and raising money for syndicated commercial real estate. His responsibilities included raising private equity, leasing to tenants, property management, managing the broker network and daily management of company.
Many of the properties owned and managed by Helios are marketed and co-brokered by Jack Reardon and Brandon Berger, two of the suburban office brokers in the Northwest Chicago market.
At A Glance
| Investment Type: | Preferred Equity |
| Projected Term: | Lesser of 60 months or repayment of existing senior loan |
| Total Project Budget: | $22,475,000 |
| Expected Current Pay to Investors (net): | 12% annually (1) |
| Leverage (Including Preferred Equity) | 81% Loan to Cost at closing, 76% Loan to Value, As-Stabilized |
| Prepayment Penalty: | 12 months payment maintenance |
| Going-In Cap Rate (September 2014-August 2015): | 7.62% |
| Sr. Loan + Preferred Equity Debt Service Coverage Ratio (Year 1): | 1.71x |
| Projected First Distribution: | February 2016 |
| Expected Distribution Schedule: | Monthly |
| Investor Funding Deadline: | December 18, 2015 |
| Estimated Closing Date: | December 21, 2015 |
(1) - The Series A Preferred Return Rate stated in the Sponsor Entity Limited Liability Company Agreement (“Sponsor Operating Agreement”) is equal to thirteen percent 13% per annum, cumulative and compounded monthly to the extent not paid on a Distribution Date. Upon receipt by the Company of a distribution from the Sponsor Entity, and after fees, the Company expects to distribute twelve percent 12% per annum to investors in the Company. In addition, pursuant to the Sponsor Operating Agreement, if any Changeover Event has occurred, the rate applicable in calculating the preferred return shall automatically increase an additional five percent (5%) per annum to be paid to the Company by the Sponsor Entity. All capitalized terms used in this footnote are defined in the Sponsor Operating Agreement which is attached as Exhibit A in the Issuer Document Package.
Investment Details
Helios Properties ("Sponsor") plans to stabilize 1600 Corporate Center ("the Property"), a 255,440 square foot, 12-story office building located in Rolling Meadows, IL. RealtyMogul.com investors are being provided the opportunity to invest in Realty Mogul 55 LLC ("Investor Entity" ,which is now a preferred equity/Series A member of 1600 Preferred, LLC). Realty Mogul 55, LLC will be making a Preferred Equity investment into 1600 Preferred LLC ("Property Holding Entity"), which indirectly holds title to the Property. The Sponsor plans to hold the property for two (2) years before exiting the investment, but the hold period could be longer or shorter, with a maximum of five (5) years. Investors may expect to receive quarterly updates, with the first distribution expected in February 2016 and on a monthly basis thereafter.
Through 1600 Preferred LLC, the Sponsor will indirectly own the Property and make various decisions and actions including implementing an operational improvement plan to reduce expenses, the addition of a conference center and workout facility, leasing up the currently vacant space, and ultimately selling the Property. The Sponsor purchased the asset from C-III who previously purchased the asset out of foreclosure in 2013 from a receiver.
The Sponsor specializes in acquiring and improving underperforming office and commercial assets. With over 700,000 SF of assets under management in the Chicago area, the Sponsor has extensive experience in the market and has demonstrated the ability to manage similar assets, often times reducing historical expenses by 20% to 30%. The Sponsor has underwritten a plan to reduce the over-market operating expenses down to market through the replacement of cancellable union labor in exchange for cheaper non-union labor as well as the use of his own in-house management company. For example, the Sponsor has new contracts for engineering and janitorial that will save approximately 25% and 33%, respectively, over the in-place operator. Additionally, the Sponsor plans to reduce security from 24/7 (hours per day/days per week) down to the market standard of 16/6 (hours per day/days per week). The Sponsor’s underwritten budget is in line with market comparables and the appraiser’s expenses.
In addition to operational improvements, the Sponsor intends to add a conference center and workout facility to the Property, which should assist them in maintaining current occupancy via tenant retention, as well as assist in the lease-up of currently vacant space.
Investment Highlights
- Diversified Tenant Roster With Credit Tenancy: Tenants at the Property include investment grade and national tenants including Bank of America (rated A‐ by S&P and A by Fitch), Alliant Credit Union, Fleetmatics USA LLC, HQ Global Workplaces (Regus) and the General Services Administration (US Government AA+ by S&P).
- Experienced Local Sponsorship With Proven Track Record
- Stabilized Occupancy
- Well Located: The Property is located in Rolling Meadows, adjacent to the city of Schaumburg, which is the largest center of economic development in the State of Illinois outside of the City of Chicago
- Minimal Rollover During the Loan Term: Leases representing 5.8% and 13.24% of the current rentable space expires during the initial and extended loan terms. Additionally, another 8.6% (23,140 square feet) of the rentable square footage could become available if Alliant exercises their termination option effective October 31, 2017.
- Significant Protective Equity Junior to the Preferred Equity: The Project has $1,500,000 in preferred equity invested in this transaction which is senior in distribution rights to the common equity of $4,100,000.
- "Interest" Reserve set up for Preferred Equity: Realty Mogul 55, LLC has retained $62,300 as an "interest" reserve for the four months (January-April 2016) during which the projected property level cash flows are not expected to cover the distributions to the preferred equity holder(s).
- Preferred Equity Has 12 Months of Payment Maintenance: Payment maintenance attempts to give investors the same rate of return or interest that they would have received if the Borrower did not prepay the loan early. Payment maintenance is based on the calculation of the extra funds a Borrower would have to pay to make the yield the same if the borrower made all payments through the projected maturity date.
- Well Reserved Senior Loan: Of the total loan proceeds of $16,875,000, the senior lender has required a reserve of $5,135,000 for leasing costs, a $350,000 operations reserve, and a $150,000 interest reserve.
Risks and Risk Mitigation*
- Forward-Looking Statements: Investors should not rely on any forward-looking statements made regarding this opportunity, because such statements are inherently uncertain and involve risks. We use words such as “anticipated,” “projected”, “forecasted”, “estimated”, “prospective”, “believes,” “expects, ”plans” “future” “intends,”, “should,” “can”, “could”, “might”, “potential,” “continue,” “may,” “will,” and similar expressions to identify these forward-looking statements.
- Potential Conflict of Interest Risk Regarding Debt Financing: An affiliate of Realty Mogul 55, LLC (“Lender Affiliate”) has originated the debt financing (“Loan”) for the acquisition of the Property. The Lender Affiliate earned certain fees including a fee at closing and may be entitled to fees upon extensions or other events. The Lender Affiliate sold the Loan at closing to an unaffiliated third party, at which point the Lender Affiliate had no ownership of the Loan or decision making authority with regard to the Loan.
- Illiquid Investment - Transfer Restrictions The transferability of membership interests in the Investor Entity are restricted both by the operating agreement for that entity and by U.S. federal and state securities laws. In general, investors will not be able to sell or transfer their interests. There is also no public market for the investment interests and none is expected to be available in the future. Persons should not invest if they require any of their investment to be liquid. This is particularly important for persons of retirement age, who should plan carefully to assure that their assets last throughout retirement.
- Interest-Only Loan: The loan being used to acquire the Property is interest-only for the first two years of operation and during the first extension year, which means that there will be no reduction in the principal balance during that period. The second two extensions are subject to amortization on a 30-year schedule.
- "Interest" Reserve set up for Preferred Equity: The projected cash flow from the Property does not appear to be sufficient to pay the expected distribution to the preferred equity holder for a number of months after acquisition. The Investor Equity has retained $62,300 as a payment reserve for the four months (January-April 2016) during which the projected property level cash flows are not expected to cover the distributions to the preferred equity holder(s).
- Senior Loan Cash Trap/Cash Management Provision: The Senior Loan has a provision ("Cash Management Provision") that could prevent cash flow from being distributed to the Borrower in the event that certain events occur ("Trigger Events") including, but not limited to the debt yield for the Lender falling below a certain threshold and certain key tenants failing to pay rent or an event of default under the Loan. If this were to occur it would likely prevent or delay the ability of the Sponsor to make distributions to the preferred equity holder (Series A Holder) as contemplated by the 1600 Preferred, LLC Operating Agreement, despite the fact the property may be generating sufficient cash flow to make such distributions to the preferred equity holder if it were not for the Cash Management Provision. In the event of a Trigger Event, all excess cash flow after reserves and senior loan debt service would be held in the deposit account controlled by the lender or servicer and would be released only once the property met the conditions for release. This is a brief summary of the Cash Management Provision and does not include all the relevant information; the Loan Agreement, the Cash Management Agreement and the Lockbox Account Agreement are available upon request and potential Investors should review these agreements for additional information on this risk prior to making an investment decision.
- Debt With a Five-Year Term: The senior loan on the Property can be extended such that the total term could be up to five (5) years, subject to pre-negotiated conditions to extend including, but not limited to (1) meeting a minimum debt yield threshold on the senior loan; (2) renewal of an interest rate cap; and (3) payment of an extension fee. The term length potentially creates capital markets risk in the event that market conditions deteriorate over the next five years impacting the Sponsor’s ability to sell the Property or obtain replacement financing. Although there can be no assurance that the property would qualify for a loan extension under such circumstances, the Sponsor believes that it is likely that the property would qualify for such an extension based on the projected stabilized net operating income of the property, with no reliance of any future leasing of vacant space.
- Lease-Up of Vacant Space: There is a risk that the leasing team will be unable to lease up the currently vacant units at the Property. This would have an adverse impact on future cash flow and projected value for the Property to the extent that such vacancies were to remain higher than projected. This risk is partially mitigated by the nominal rollover of space during the hold period and the experience of the Sponsor in managing properties of a similar type.
- Local Market Conditions May Impact Rental Rates: Local conditions may significantly affect occupancy, rental rates, and the operating performance of a property. Such risks include (but are not limited to): (i) plant closings, industry slowdowns and other facts that affect the local economy; (ii) an oversupply of, or a reduced demand for, similar properties; (iii) a decline in household formation or employment or lack of employment growth, (iv) laws that could inhibit the ability to raise rents or to sell a property; and (v) other economic conditions that might cause an increase in operating expenses, such as increases in property taxes, utilities, compensation of on-site personnel and routine maintenance.
- Preferred Equity is Not Secured: Preferred Equity is not secured by any collateral. In the event that a sponsor fails to make any payments to the Preferred Equity, the Investment Entity has limited remedies to require or encourage payment. Preferred Equity holders are generally not entitled to pursue a collection action against the Sponsor as a lender may be entitled to do. Preferred equity investors may generally only look to the LLC in which it has invested for payment.
- Preferred Equity is Subordinate to Existing and Future Debt: Preferred equity will generally constitute equity interests in the LLC in which it has invested, not indebtedness. Thus, with respect to assets available to satisfy claims, including in its liquidation, preferred equity is subordinate to all indebtedness and other non-equity claims. Further, preferred equity may potentially rank junior to other classes of equity of in the LLC in which it has invested. Obligations to existing and future indebtedness, and potentially other classes of equity, may limit payment of preferred return on preferred equity. Preferred equity returns are payable solely pursuant to the terms of the controlling agreements, including the 1600 Preferred, LLC operating agreement. Restrictions on the LLC and/or Sponsor’s business, operations, and its ability to acquire indebtedness are often limited.
- Redemption Risks: Preferred equity typically will provide for periodic preferred return payments (often at the discretion of the Sponsor) with a large redemption payment due on the mandatory redemption date. Sponsors may be unable or not obligated to make principal or redemption payments out of their own funds and therefore are generally obligated to refinance or sell their property to redeem preferred equity. Further, fluctuations in real estate value, interest rates and the unavailability of mortgage funds may adversely affect the ability of Sponsors to refinance their loans at maturity or successfully sell the property for enough money to redeem the corresponding preferred equity.
- Management Risk: Investors will be relying solely on the Sponsor for the execution of its business plan. The Sponsor may in turn rely on other key personnel with relevant experience and knowledge, including contractors and consultants. Members of the Property Holding Entity (including the Investor Entity) will agree to indemnify the manager in certain circumstances, which may result in a financial burden if any litigation results from the execution of the business plan.
- Uncertain Exit Timing: Although it is anticipated that the Property will be sold at the end of the maximum five (5) year loan term, the Investor Entity will not have full control over the timing of the sale of the Property, and therefore we cannot offer assurances of when the exit will occur.
- Lease Expirations: Leases expirations and downsize options for space representing approximately 5.8% of the net rentable area for the Property will occur on or before December 2016. Leases expirations and downsize options for space representing approximately 21.8% of the net rentable area for the Property will occur within the five (5) year period after the date the 1600 Preferred, LLC Operating Agreement was executed. Although reserves have been required by the senior lender in case some or all of the tenants do not continue to occupy their existing space, reductions by current tenants could negatively impact the cash flow and value of the Property.
- Lender Approval Required for Investor Entity to Take Control of 1600 Preferred, LLC: In the 1600 Preferred, LLC, the Investor Entity is entitled to take over as the manager of such LLC if certain events occur. However, prior to Investor Entity taking over as the manager of such LLC the Investor Entity must obtain approval from the Senior Lender or it could trigger an event of default under the terms of the senior loan. So, it is possible that the Investor Entity will not be able to effectively exercise its right to take over as manager of such LLC in a timely manner or at all.
- Sponsor Principal Credit History: One of the principals of the Sponsor, within the last three years, entered into a loan workout with two lenders on his personal residence, and while foreclosure did not occur, each lender did initial a foreclosure action on the property. Both actions were dismissed when the loan workout was completed (including a substantial paydown of the loan principal balance) and the reinstated loan has been paid as agreed. RealtyMogul.com's due diligence included lender reference checks with lenders the Principal has borrowed from over the last several years with RealtyMogul.com receiving what it believes was favorable lender responses on the Sponsor’s payment history as well as his management performance.
- Guarantor Credit History: In addition to the above described Sponsor Principal Credit History, one of the guarantors of the Senior Loan had four single-family residences (both primary and held for investment – acquired between 2005 and 2007) which were subject to defaults under the senior loans. On two of the defaults, the guarantor was able to effectuate short-sale settlements with the senior lenders, and in the other two, the senior lenders successfully prosecuted a foreclosure against those properties. In its due diligence, RealtyMogul.com ran its typical litigation searches and found no material issues other what than has been disclosed above.
- General Economic and Market Risks: While the Sponsor has conducted significant research to justify the intended rental rates and sales price relative to comparable properties in the market, its best efforts to forecast economic conditions cannot state for certain whether or not investor sentiment and the capital markets will be favorable to the property at the intended disposition date. The real estate market is affected by many factors, such as general economic conditions, the availability of financing, interest rates and other factors, including supply and demand for real estate investments, all of which are beyond the control of the Sponsor.
*The above is not intended to be a full discussion of all the risks of this investment. Please see the Risk Factors in the Investor Document Package for a discussion of additional risks.
| Address: | 1600 Golf Road Rolling Meadows, IL 60008 |
| Year Built: | 1986 |
| Current Occupancy: | 91% |
| Net Rentable Area: | 255,440 square feet |
| Land Area: | 10.43 +/- acres |
| Stories: | 12 |
| Parking: | 1,022 spaces available, 4.0 per 1,000 square feet of rentable area |
| Construction Type: | Steel |
1600 Corporate Center is a high-rise office property totaling 255,440 square feet of net rentable area on a 10.43-acre site at 1600 Golf Road in Rolling Meadows, Illinois. The Property, built in 1986, is currently 91% occupied by nine tenants with Bank of America (36.3%, Fleetmatics (16.7%), Alliant Credit Union (16.6%), and HQ Global Workplace/Regus (8.5%) representing the Property's largest tenants. The exterior improvements were constructed with steel and concrete masonry. The roof is single-ply EPDM membrane with rock gravel ballast on rigid insulation over a concrete panel deck. The interior is finished with painted drywall walls and ceilings, with fixed double-glazed windows in aluminum framing. The flooring is a mix of standard commercial carpet, vinyl composition tile, and ceramic tile. Amenities at the Project include a deli and on‐site management. The Subject features 1,022 surface parking spaces (parking ratio of 4.0 per 1,000 SF).
Note that the Stacking Plan above does not include the recently executed lease to Webtrans for 1,534 SF. The tenant is expected to commence occupancy January 2016 and has a term of 65 months. Per their recently executed third amendment, Bank of America has extended their lease expiration date for all occupied space through December 2023.
All numbers cited below were obtained from the Appraisal (see the Property Reports section) performed by Colliers International. The appraisal uses market statistics and data from CoStar.
Demographic statistics were obtained from the United States Census Bureau.
The Property is generally bounded by the neighboring suburbs of Palatine to the north and northwest, Arlington Heights to the east, and Schaumburg to the south and southwest. The Property has street frontage on two arterials, Golf Road and New Wilke Road. There are two full access curb cuts along New Wilke Road. The Subject is located approximately 1.5 miles from the I-90/I-290 interchange. The Sponsor believes the Property has good visibility at a signalized corner location along a commercial corridor, Golf Road.
The Chicago MSA has a diverse culture and business climate with a workforce that combines and unites to create and maintain an economic stronghold in America’s heartland. The Chicago region is attractive to potential investors as it offers a vibrant atmosphere, supported by top universities, urban attractions, and a history of stability. With a population of approximately 9.7 million, the Chicago MSA is the 3rd most populated MSA in the US. Over 400 major corporate headquarters make their home in the Chicago MSA with 27 of the 31 Fortune 500 companies situated in Illinois among them. According to the Economist Intelligence Unit, the City of Chicago is anticipated to achieve the 9th rank out of 120 cities worldwide by the year 2025 in regard to its ability to attract capital, talent, businesses and people; currently Chicago is ranked 12th.
Chicago Office Overview
As indicated in the chart below, the Chicago Market reported Year-End 2014 Inventory, vacancy and the average quoted asking rent of 473,635,235 square feet, 14.1% and $22.13 per square foot, respectively. Over the past ten years, the market had a compound annual growth rate (CAGR) of 0.3% per year. Vacancy ranged from 12.5% to 15.6% with an average of 14.1%. Vacancy decreased from 14.2% in 2005 to 12.5% in 2007, increased from 12.5% in 2007 to 15.6% in 2010 and decreased from 15.6% in 2010 to 14.1% in 2014. Over the past ten years, asking rent levels fell at a CAGR of -0.4% and hit a low of $21.78 per square foot in 2011 and a high in 2008 at $24.04 per square foot.
As of 2Q2015, the Chicago market had a total office supply of 474,434,837 square feet with 65,531,239 square feet vacant, indicating a current vacancy rate of 13.8%. There was 308,978 square feet completed last quarter with a current annual asking rate of $22.28 per square foot. There are 23 office projects under construction in the Chicago office market totaling 5,402,061 square feet, which represents 1.1% of supply that will be added in the near term.
Schaumburg Office Overview
The Subject is located in Rolling Meadows, adjacent to the city of Schaumburg, which is the largest center of economic development in the State of Illinois outside of the City of Chicago. Atrium Corporate Center is the largest office development in the immediate area. The Subject is noted as the ninth largest office property in the area.
Over the past ten years, the Schaumburg Area office submarket inventory increased by 5.2%. Further, there was slight positive net absorption (1.1%), a fluctuating vacancy rate that ranged between 13.1% and 18.6%, and an overall decrease of the asking average rent (-2.0% CAGR).
As of 2Q2015, the Schaumburg Area market had a total office inventory of 35,385,334 square feet with 5,780,772 square feet vacant, indicating a current vacancy rate of 16.3%. The current asking rent in the submarket is $17.41 per square foot and there is no additional inventory delivered in the same period.
