Lincoln Square
WIP-Lincoln Square, LLC, “Lincoln Square” is a commercial real estate syndication around two five-story and a single one-story multi-tenant office buildings. The 118,537 combined square foot buildings at Northwest 2nd Ave in Miami, Florida, were purchased after over a year of tough negotiations in a February 2021 private market transaction.
The property was acquired at an 8.9% CAP rate, based on first year estimated operating income of $1.4 million at a $15.35 million purchase price with an estimated stabilized market value of $17 million in 2021. Inspections during due diligence confirmed the good condition of the buildings and minimum capex requirements.
Lincoln Square represented a stabilized investment with 93.5% occupancy that had not fallen during the COVID pandemic. The team’s risk analysis was extremely favorable. Tenant analysis showed the tenant base to be almost entirely community and health service providers at 89% (social and mental health services, education, medical training, healthcare, government services) with professional services representing 11% of tenant revenue. Tenants were judged to be unusually resilient to both COVID pandemic work from home and general recession risk issues.
The team was positive on the location merits in terms of submarket class-C office supply, as well as positive on the business and demographic trends around Miami Florida. In addition, the team believed it could realize significant synergies by leveraging property management resources, onsite expertise and vendor relationships successfully employed at neighboring Washington Square for the Lincoln Square properties to the execution and cost-sharing benefit of both investments. Financial modeling around a seven-year hold projected returns for an investor with a minimum $100,000 commitment at:
- Preferred Return: 9.0% (Projected initiating immediately)
- Internal Rate of Return (IRR): 15.2%
- Annual Return: 17.8%
- Cumulative Return: 124.89%
However, like many office properties in the United States by 2023 Lincoln Square was facing difficulties. However, this was not due to remote work trends leading to high vacancies, weak performance of urban core office properties or a suffering local downtown. Fortunately, the team’s positive analysis of the Miami real estate market and supporting conditions around tenant demand for this type of property were largely validated over the first few years of operations. Instead, a spate of largely random events conspired to cause difficulties for this particular property.
The two largest tenants both encountered unexpected economic and in one case also legal difficulties, despite a positive prior track record, creating a significant vacancy spike. With the AC system multiple units suffered extremely expensive failures, despite passing inspections prior to the building’s purchase. Combined with a rise in insurance costs and a few other negative developments, the partners suspended distributions, turned to investors for a capital call in the fourth quarter of 2023 to inject new funds into the property, and paused receipt of property management fees.
Fortunately, by 2024 occupancy was trending positive and the team was making progress in both repairs and increasing economic occupancy. As a result, a random tenant event transitioned Lincoln from a core plus strategy to a case study in a real estate turnaround. It reflects the value of competent management team, and that team’s ability to create value through tightening the belt, and pursuing alternate strategies that created time for the property to rebound.
Analysis showed that despite the general challenges for office properties post-COVID and specific challenges for the property, its value had actually increased since its purchase. It has become a case study of how the partnership provides value in being able to successfully deal with unforeseen challenges and manage through obstacles. Many of the team’s projects perform largely as expected. Lincoln Square became a case study on whether the team can successfully manage through a property investment where seemingly things that could go wrong do. The good news is that by mid 2024 solid progress was being realized.