At A Glance

Investment Details

JOSS Realty Partners ("JOSS") plans to recapitalize and continue with the repositioning of Georgetown Plaza ("the Property"), a 150,097 square foot Class B office building located in the Georgetown neighborhood of Washington, DC. The property is located in less than one mile from Georgetown University's main campus and provides a desirable location for a diverse tenant base in a supply-constrained submarket. Realty Mogul investors are being provided the opportunity to invest in Realty Mogul 19, LLC.  Realty Mogul 19, LLC earlier made an investment, and will now be making a follow-on investment, in 2233 Wisconsin NY Member LLC, which will hold the leasehold interest in Georgetown Plaza.

A leasehold interest is an interest in real property, often referred to as a "ground lease", in which the property owner grants the leasehold interest holder the right to occupy and use the land for a defined period of time. After that period of time expires, the interest in the land and all improvements to the land reverts back to the land owner. The expiration of the current leasehold is 91 years with an expiration on October 1, 2105.

JOSS will handle all aspects of the investment including recapitalizing the property, completing a strategic property upgrade and leasing program, and ultimately selling the property. They will be responsible for improving the appeal of the property to current and prospective tenants with an investment of capital into amenities and common area upgrades as well as a tenant inducement package. The Property was under-managed by prior ownership because it was a non-core holding, providing the opportunity for JOSS's improvement plan to potentially increase both occupancy levels and the average rental income per square foot at Georgetown Plaza to bring it in line with comparable properties in the market. 

JOSS plans on holding the Property for two additional years before exiting the investment, although the hold period could be longer or shorter. Realty Mogul investors have the opportunity to participate as equity stakeholders and earn a share of the cash-flow and appreciation.  Investors can expect to receive quarterly updates and quarterly distributions, with the first distribution expected 60 days after the first full calendar quarter post-closing expected in August 2015.

This transaction represents a unique opportunity to participate in the recapitalization of a well-located office property in close proximity to a large and expanding university at the same cost basis as when the Property was acquired in July 2014. The Sponsor has made progress under its business plan and the Property is currently outperforming the Sponsor's original projections. 

Investment Highlights

• Favorable Acquisition Cost Basis Providing Downside Protection: The original purchase price of $179 psf represents a going-in yield of 8.3% (based on year one NOI), a stabilized yield of 9.1% (based on year two NOI) and a discount to both replacement cost and recent office sales in Washington, DC. With an estimated value of the ground lease at $100 psf, the Property’s $279 psf implied fee simple (properties that are not on a ground lease) purchase price is well below the average price of recent Class B office sales of $476 psf in downtown Washington, DC. The 8.3% going-in cap rate is in excess of market trades, making this a compelling investment given its location in Washington, DC.

• Outperforming Original Leasing Projections: The Sponsor has increased occupancy from 79% to 82% since acquisition with the execution of a 4,116 square foot lease to an investment advisory business. They are also nearing the execution of a lease for 7,420 square feet of space located in the lower level retail portion of the Property. The Sponsor did not project leasing this space in their original projections.  Upon execution, this lease should bring occupancy up to 88%, well above the 82% the Sponsor originally projected reaching over that time span. The Sponsor earlier did not project the Property to reach 88% occupancy until the third quarter of 2015. Additionally, the Sponsor has executed several lease renewals and extensions at rates equal to or surpassing those originally projected.
• Potential Upside Through Renovation and Lease-Up: The Property's current occupancy of 82%, and 88% occupancy should the street level lease be completed, are both well below the Property’s primary competitors (2115 Wisconsin Ave., 2121 Wisconsin Ave. and 2201 Wisconsin Ave.) which are at or above 90% occupancy. The Property was a non-core holding in the previous owner's portfolio, but was a niche play for JOSS, which has a track record of repositioning class B office assets in Washington, D.C.  JOSS is investing in amenity-driven and common area upgrades while offering tenant inducement packages to improve occupancy and rents.  Georgetown Plaza serves as a logical location for Georgetown University to expand as an owner/occupier as the university is currently fully occupied.  The University is space constrained, making expansion and possible acquisition of Georgetown Plaza a logical choice in the future.
• Supply Constrained Micro Market with High Demand:  Georgetown Plaza is one of only a few properties in the area offering a value alternative for small tenants seeking a Washington, D.C. address with downtown access at a discount to downtown rental prices.  Its proximity to Georgetown University makes it particularly attractive to several key tenants; the Property serves as a satellite location for Georgetown University and MedStar Health, two of the area’s largest tenants and each of whom require office space convenient to Georgetown University’s main campus (which is fully occupied) and hospital located less than one mile away​
• Experienced Sponsorship: JOSS is a private owner/operator real estate investment management firm headquartered in New York City. Since its inception in 2005, JOSS has acquired 17 office assets totaling over 2.75 million square feet with a value in excess of $750 million. JOSS also owns BMS Real Estate Services LLC, an affiliated property management company with over 1,500,000 square feet of office space currently under management.

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.
• Illiquid Investment - Transfer Restrictions & No Public Market: The transferability of membership interests in Realty Mogul 19, LLC 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.
• Poor Metro Access: The location suffers from poor Metro access with the nearest Metro stops (Dupont Circle and Foggy Bottom) 20 minutes away on foot. However, the Property’s above standard parking ratio and 89 surface spaces help to offset the poor Metro access. Also, the Property is situated along the daily Circulator and 30, 32, 34, 35 and 36 Metrobus routes, which provide access to downtown Washington and north along Wisconsin Avenue into Maryland. In addition, the supply constrained micro-market has no new planned office development. Both Georgetown University and Hospital are land constrained on their respective campuses.
• Historically Unbalanced Leasing Environment: Against the backdrop of government spending uncertainty, the current leasing market, which is relatively favorable for tenants may extend for a prolonged period of time.  However, JOSS has contemplated high tenant inducement costs in its underwriting ($55-60 psf, which compares favorably to the $45-50 psf that the previous owner had been offering), even as Washington D.C. vacancy rates are at or near cyclical lows.  Georgetown Plaza is well capitalized to attract and retain tenants with above average inducement costs  (if necessary) throughout the investment period and may outperform expectations as negotiating power between landlords and tenants re-balances. Furthermore, with pro forma rents starting in the low $30's per square foot gross rent, the Property will maintain its status as the low cost provider of suburban office space in Washington, DC.
• Lease Up of Vacant Space: There is a risk that the leasing team will be unable to lease up the vacancy in the building.  This would have an impact on future cash flow and projected value for the property.  This risk is partially mitigated by an experienced leasing team as JOSS has retained Cushman & Wakefield, one of the major leasing firms in Washington DC. The team has launched a new marketing campaign with a strong focus on branding while also creating a website to facilitate leasing at the Property. Since taking the assignment, they have increased the occupancy at the Property from 79% to 82% by executing a 4,116 square foot lease to an investment advisory business, along with several renewals / extensions. Additionally, although there can be no assurance of its consummation, the Sponsor expects to execute a lease for 7,420 square feet located in the lower level retail space.  Several other new and renewal leases are also out for review.
• 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.
• Management Risk: Investors will be relying solely on the manager of 2233 Wisconsin NY Member LLC for the execution of its business plan. That manager in turn may rely on other key personnel with relevant experience and knowledge, including contractors and consultants. Members of 2233 Wisconsin NY Member LLC (including Realty Mogul 19, LLC) 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. While the manager of 2233 Wisconsin NY Member LLC has significant operating experience, 2233 Wisconsin NY Member LLC is a newly formed company and has no operating history or record of performance. Realty Mogul 19, LLC has no voting rights or ability to remove the manager of 2233 Wisconsin NY Member LLC.  Realty Mogul 19, LLC is pursuing a venture capital strategy through an investment in an operating company that manages and develops real estate; RM Manager, LLC, the manager of Realty Mogul 19, LLC, is expected to be treated as an investment adviser exempt from federal or state registration under this strategy.
• Rising Interest Rates: The Federal Reserve has announced plans over time to methodically reduce the amount of stimulus it would inject into the U.S. economy. This could potentially lead to rising interest rates and have an effect on the future value of the property. This risk will be partially mitigated because JOSS has purchased interest rate protection upfront for the three year term. This risk is also partially mitigated by the steadily increasing rental rates and income for the property that should be beneficial in offsetting the effects of future interest rate increases.
• High Leverage: At closing this transaction employed high leverage (77.8%), which may increase the risk of default on the debt. The lender is requiring a minimum debt yield of 7.0%, which is equivalent to $1.72 million based on a total funding of $24.5 million. Based on the proforma provided by JOSS, projected debt yields for years 1 and 2 are 9.1% and 9.2%, respectively, allowing for over 200 bps of downside protection in debt yield if projections are not met.
• Ground Lease: A ground lease is typically defined as the lease of land for a relatively long term (e.g., 50 to 99 years), where all expenses of the property are the obligation of the tenant (e.g., taxes, repair and maintenance expenses, insurance costs, and financing costs). A tenant’s leasehold interest under a ground lease may be considered a “diminishing asset” in that the value and marketability of the project will diminish as the end of the term nears. This risk is partially mitigated by the fact that the property is subject to a 91-year ground lease. According to JOSS, ground lease structures are common for the area and the ground lessors were very easy to work with.
• Risk of Interest Charges or Dilution for Capital Calls: The amount of capital that may be required by 2233 Wisconsin NY Member LLC from Realty Mogul 19, LLC is unknown, and although 2233 Wisconsin NY Member LLC does not require that its members contribute additional capital to it, it may from time to time request additional funds in the form of additional capital.  Realty Mogul 19, LLC does not intend to participate in a capital call if one is requested by 2233 Wisconsin NY Member LLC and in such event the Manager of 2233 Wisconsin NY Member LLC may accept additional contributions from other members of 2233 Wisconsin NY Member LLC.  Amounts that the Manager and/or the contributing members of 2233 Wisconsin NY Member LLC advance on behalf of the Company will be deemed to be member loans at an interest rate of 18% or to be additional capital contributions. In the case they are deemed to be additional capital contributions, Realty Mogul 19, LLC's interest in 2233 Wisconsin NY Member LLC will suffer a proportionate amount of dilution.
• Uncertain Distributions: The manager of 2233 Wisconsin NY Member LLC cannot offer any assurances that there will be sufficient cash available to make distributions to its members (including Realty Mogul 19, LLC) from either net cash from operations or proceeds from the sale of the asset. That manager, in its discretion, may retain any portion of such funds for tenant improvements, tenant refurbishments and other lease-up costs or for working capital reserves.
• General Economic and Market Risks: While JOSS 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 manager of 2233 Wisconsin NY Member LLC.

*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.