Confidential Offering Memorandum Santa Clara, California

Confidential Offering Memorandum
Santa Clara, California
(916) 446-8700 • www.palmercapital.com
Palmer Capital, Inc. (“Palmer Capital”) and the owner (“Owner”) of the property referenced herein (“Property”) present this Confidential Financing Memorandum
(“Memorandum”) to assist the recipient(s) (“You” or “Your”) in evaluating the Property and it is intended for Your use only. This Memorandum contains brief,
selected information pertaining to the Property and should not be considered all-inclusive or permanent. The information in this Memorandum has been
obtained from sources believed to be reliable, but has not been verified and is not guaranteed. You should independently verify each item of information
and have the same reviewed by Your tax advisor and/or legal counsel. Assumptions, projections, estimates and/or opinions are provided as examples only
and all information is subject to change, error, omissions and/or withdrawal without notice. Palmer Capital and Owner assume no responsibility for and
make no warranty as to the accuracy or completeness of any information in this Memorandum. Palmer Capital and Owner expressly disclaim any implied
or expressed warranties of merchantability, fitness for a particular purpose or non-infringement of intellectual property relating to this Memorandum. In no
event shall Palmer Capital or Owner be liable for any damages resulting from the reliance on or use of any information in this Memorandum, including but
not limited to direct, special, indirect, consequential or incidental damages. By accepting receipt of this Memorandum, You agree to the following: (a) This
Memorandum is of a highly confidential nature, will be held in the strictest confidence and shall be returned to Palmer Capital upon request; (b) You shall not
contact any property manager, employee or tenant of the Property regarding the Property or this Memorandum, without prior approval of Palmer Capital or
Owner; and (c) You understand and agree that Palmer Capital represents Owner and not You. Neither Palmer Capital nor Owner shall have any obligation
to pay any commission, finder’s fee, or any other compensation to any broker or other person. You may provide information to persons retained to evaluate
the Property only after first obtaining a signed confidentiality agreement from such persons and providing a copy of such agreement to Palmer Capital.
By accepting receipt of this Memorandum, you agree to defend, indemnify and hold harmless Palmer Capital and Owner (including all of their agents,
employees, subsidiaries, affiliated entities, successors and assigns) from and against any and all claims, disputes, litigation, demands, damages, liabilities,
losses, judgments, expenses, fines, contributions, charges, injuries and/or costs and expenses, including reasonable attorneys’ fees, arising or resulting
from acts by You. The Owner expressly reserves the right, at its sole discretion, to reject any or all expressions of interest or offers to finance the Property,
and/or to terminate discussions with any entity at any time with or without notice which may arise as a result of review of this Memorandum. The Owner
shall have no legal commitment or obligation to any entity reviewing this Memorandum or making an offer to lend on the Property unless and until written
agreement(s) for the finance of the Property have been fully executed, delivered and approved by the Owner and any conditions to the Owner's obligations
therein have been satisfied or waived.
Copyright © 2012 Palmer Capital, Inc.
All use, disclosure and/or reproduction not specifically authorized is prohibited. All rights reserved. 00963368
Table of Contents | 3
Introduction
Property Specifics
Financial Analysis
Tenant/Lease Information
Market Information
5
Executive Summary
6
Investment Highlights
14
Comparables
18
Adjacent Owners
24
Parcel Map
26
Site Plan
27
Due Diligence
28
Property Description
30
Cash Flow Analysis
32
Rent Roll
32
Rent Roll Comments
32
Lease Rollover
34
Historical Summary – Detail
34
Historical Summary
35
Assumptions
36
Replacement Cost
37
Lease Summary
39
City/County Interviews
40
Market Executive Summary
41
Market Analysis
48
Maps & Driving Directions
Sunnyvale
(6 Miles)
Campbell
(12 Miles)
e
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Ex
ay
sw
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101
Freed
om C
Mo
a
nt
ege
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Missio
Adjacent Owner Legend
1
2305 Mission College Boulevard (Subject Property)
- Invesco Real Estate
2
2250 Agnew Road - OmniVision Technologies
3
4275-4295 Burton Drive - OmniVision Technologies
4
2175 Mission College Boulevard - PerkinElmer Inc
5
4250 Burton Drive - PacTrust
6
2151 Mission College Boulevard - PacTrust
7
Intel Campus
8
Mission City Center - Pacific Coast Capital Partners
9
2201 Laurelwood Road - Vishay Intertechnology Inc
10 McCandless Towers - Shorenstein Properties
11 Santa Clara Towers - Shorenstein Properties
12 Mission Towers I - Equity Office / Blackstone
13 Mission Towers II - Shorenstein Properties
vard
Boule
ircle
Executive Summary | 5
The Offering:
The General Dynamics building is a ±360,000 square foot Office/R&D asset which is 100% leased to General Dynamics
(“A” S&P Credit Rated). General Dynamics’ initial lease term expires in May 19, 2016 at a significantly below market rent.
The property is positioned within one of the most technology oriented areas in the Silicon Valley known as the “Golden
Triangle.” The subject property was originally built in three phases from 1979-1985 and underwent significant and costly
renovations in 1997-2005 to specifically accommodate General Dynamics’ use.
Offering Highlights Include:
•
•
•
•
•
Favorable Lease Rate Renewal Structure - Fair Market Value lease extension options which doesn’t limit the potential
upside in future rental income upon rollover. In addition the tenant is responsible for all maintenance and occupancy
costs, providing investors with a management free investment.
Corporate Concentration – Surrounding the General Dynamics building is an abundance of Fortune 500/Internationally
recognized companies, including: Intel, Cisco, Oracle, KPMG, Yahoo, Dell, Marvell, Avaya, McAfee, Abbott Labs, Applied
Materials, WebEx, and EMC.
Job Growth – The Silicon Valley is projected to add over ±38,500 new office
jobs over the next five years, which translates into ±9.6M SF of office demand.
Market Recovery – The “Golden Triangle” has already experienced significant
leasing momentum since 4th Quarter 2010 where vacancy has decreased by
The Property is offered free and
clear of existing financing.
over 500 basis points to ±14%.
Address:
acres of land, which based on current zoning could accommodate a ±685,000
Santa Clara, California
Downside Protection in Land Value – The subject property contains 15.783
square foot office building. Based on recent land sale transactions in the
market, the property’s land value and the net present value of the remaining
•
Existing Financing:
lease would be approximately ±$75,000,000.
Project History – Originally owned and occupied by Nortel Networks and
served as the company’s regional headquarter facility. General Dynamics has
been in occupancy since 2005.
Occupancy
Percentage Rollover/Lease Up - SF
Net Operating Income
Percentage Change From Acquisition
Contract Rent PSF
Market Rent PSF
Contract Rent % of Market
Actual In Place
7/1/2012
100.00%
2305 Mission College Boulevard
Total Rentable Area:
358,503 square feet
Occupancy:
100%
Year 1
(07/12-06/13)
Year 3
(07/14-06/15)
Year 5
(07/16-06/17)
Year 10
(07/21-06/22)
0.00%
0.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
$4,517,356
$4,528,595
$4,664,830
$9,017,786
$10,461,801
$12.60
$12.63
$13.01
$25.17
$29.18
70.18%
57.14%
$18.00
0.25%
$18.00
3.26%
$22.77
99.63%
$26.80
93.93%
131.59%
$32.28
90.41%
6 | Investment Highlights
stable income stream with significant upside
The General Dynamics building’s income stream is secured by General Dynamics (“A” S&P Credit Rating), with a lease
expiration of May 19, 2016. The current monthly rental rate of $1.05/NNN per square foot is 30% below the current market
rent of $1.50/NNN. The in-place lease calls for annual bumps of 1.50% through the remaining lease term which at expiration
will increase to $1.10/NNN per square foot. Demonstrated below is the significant upside potential in the net operating
income assuming future ownership renews General Dynamics at a fair market value rate (“FMV”). The current lease
has three remaining FMV options for three years of term.
contract vs market rent
Investment highlights
A
current rent today
The market rents we utilized a $1.50/NNN per square foot based upon current trends and recently completed
c
sustainbale market rent growth
leases in the market. In 2001, peak office and R&D rents in the Silicon Valley exceeded $3.00/NNN per square
A key driver for rental growth in the Silicon Valley has always been heavily influence by technology oriented jobs.
foot. There is currently only one existing building in the Silicon Valley that could potentially accommodate
The following chart reflects the levels of technology employment in the Silicon Valley historically. Though the
a 300,000 SF plus user. Below are a few recent representative lease transactions in the immediate market: Please
Technology Sector has adding 26,700 jobs since 2010, the sector is still ±150,000 jobs less than peak
reference page 16 for additional rent support.
levels experienced in 2000. This indicates there is still significant growth potential to this sector over the next
five years to further future office demand.
Silicon Valley Tech Jobs and Total Non-Farm Employment
b
Market momentum
Santa Clara has historically trailed submarkets to the West (Palo Alto, Mountain View, & Sunnyvale) in occupancy
and rental rate growth. The below demonstrates these market’s tightening and the positive affect already
Based on Moody’s Economy.com, the Silicon Valley is anticipating an additional ±38,500 office jobs over
transpiring in Santa Clara.
the next four years which at an estimated 250 square feet per employee would translate into ±9.6 million
square foot of new office demand.
Total Office
Employment
NEW SF Demand
2012
374,682
1,795,500
2013
380,478
1,449,000
2014
392,784
3,076,500
2015
405,972
3,297,000
2016
416,597
2,656,217
5yr Forecast
Office Jobs Added
11.19%
41,915
When the Silicon Valley’s vacancy rate has dropped
below 14% in the past, the annual average rent
growth has been 22.50%. We have conservatively
grown rents at 15%, 10%, 10%, 7% and 7% through
first five years of the analysis. Below demonstrates
the vacancy and rental rate projects based off
the anticipated job growth for the Silicon Valley.
Palmer Capital Inc
Investment Highlights
Market rent growth support
Inventory
Inventory Change
1997
177,199,418
1998
1999
Premier Silicon Valley Location
Silicon Valley Office/R & D Market
Fueled by the recent leasing momentum in the market, the
Silicon Valley’s (Santa Clara County) unemployment
Vacancy
Net Absorption
NNN Rent
Rent Change
N/A
3.8%
(2,074,525)
$1.27
N/A
182,086,836
2.8%
7.1%
1,341,565
$1.82
43.3%
Bay/San Jose market which is commonly referred to as the
192,546,012
5.7%
5.2%
12,727,190
$1.88
3.3%
2000
200,275,119
4.0%
2.5%
13,086,923
$2.86
52.1%
Silicon Valley. The Silicon Valley has experienced a robust
2001
210,650,030
5.2%
13.0%
(9,063,107)
$2.53
-11.5%
2002
220,586,570
4.7%
17.6%
(7,144,577)
$1.63
-35.6%
where gross absorption for office space has exceeded
2003
222,152,157
0.7%
19.5%
(3,578,967)
$1.18
-27.6%
2004
223,077,901
0.4%
18.4%
3,203,514
$1.05
-11.0%
2.0 million square feet per quarter, which represents the
2005
224,023,752
0.4%
16.6%
4,804,389
$1.05
0.0%
2006
224,603,047
0.3%
15.0%
3,385,123
$1.04
-1.0%
in 2011 Google backfilled 3.5 million square feet (±650,000
Silicon Valley Highlights:
2007
224,558,186
-0.0%
13.3%
4,408,957
$1.43
37.5%
2008
224,359,016
-0.1%
13.8%
(749,969)
$1.58
10.5%
square feet leased) which was in addition to them adding a
•
±9 million square feet of current requirements in the
2009
225,639,121
0.6%
16.1%
(5,989,109)
$1.30
-17.7%
2010
224,001,380
-0.7%
16.0%
610,674
$1.24
-4.6%
•
46,000 jobs added past 12 months
2011
221,800,179
-1.0%
14.0%
1,950,083
$1.39
12.1%
activity was highlighted by the below 100,000 square feet or
16,918,164
Avg Vacancy
12.8%
greater leases:
•
91,600 new jobs projected over next four years
•
Highest percentage of graduate and professional degrees
Total Net Absorption 1997-2011
Avg Annual Net Absorption 1997-2011
Avg Annual
Rent Growth
(Since '97)
1,127,878
Past 5yrs Avg Annual Inventory Change
(560,574)
Projections
3.6%
Avg Annual
Rent Growth
(Sub 14% Vacancy)
22.5%
2012
221,239,605
-0.3%
13.0%
1,795,500
$1.60
15.0%
2013
220,679,032
-0.3%
12.1%
1,449,000
$1.76
10.0%
2014
220,118,458
-0.3%
10.5%
3,076,500
$1.93
10.0%
2015
219,557,885
-0.3%
8.7%
3,297,000
$2.07
7.0%
2016
218,997,311
-0.3%
7.3%
2,656,217
$2.21
7.0%
Assumptions Summary
San Jose Office/R&D Market
Current Available Space
% of Overall Emplyment Are Office Jobs
Office Job Growth 2012-2016
Projected Annual Inventory Change
Projected Absorption Thru 2016
Projected Vacancy 2016
221,239,605
31,052,025
42%
41,915
Rent Growth
Underwritten in
leasing activity over the past five consecutive quarters
highest level of gross absorption to be recorded. For example,
rate has experienced a significant decline over the
past 12 months, decreasing from 10.2% to the current
(Feb ’12) 8.8% rate. As described below, given the industry
concentration located within the Silicon Valley, the area’s
unemployment draws a significant correlation with the
NASDAQ Index.
4.3 million square foot campus. The Fourth Quarter leasing
4th Qtr Highlighted Leases
Silicon Valley for Office/R&D space
in nation.
Company
SF Leased
LinkedIn
±420,000
•
±40,000 new job postings
Synopsys
±340,000
Apple
±325,000
•
Speculative office development has begun (Irvine
MicroSemi
±180,000
Dell
±160,000
Theranos
±140,000
Symantex
±135,000
Flextronics
±130,000
Omnicell
±100,000
Nvidia Corp
±100,000
Company, Beacon Capital, Menlo, Sobrato, etc) signaling
a strengthening in the market. Please reference the Market
Analysis section for more details on the developments.
•
43% of Silicon Valley households earn over $100,000 per
•
Silicon Valley received the highest level of venture capital
year.
funding for all regions with $2.7 billion, NYC Metro was
second at $891 million.
Cash Flow Analysis
(560,574)
12,274,217
7.3%
Land value - Replacement cost
The General Dynamics building sits on nearly 16 acres of land in an infill location within the Silicon Valley. Based
upon Menlo Equities/Beacon’s land acquisition last year at ±$82 PSF on buildable square footage at 3333
Scott Boulevard, the land value for the General Dynamics building would be nearly $60M. The current zoning
allows for a floor-to-area (FAR) of 1.0 which calculates to a ±687,500 square foot office building. Based off the existing
square footage of 358,503, we have calculated a replacement value of $104,200,000 ($291 PSF). If this land was
unencumbered with an existing structure a developer would most likely maximize the site to current zoning which would
be a ±687,500 square foot building. The replacement cost rent at the teant's lease expiration will be $2.45 / NNN
which is projected to be nearly 18% above market rents in 2016.
The General Dynamics building is located within the South
Santa Clara Unemployment Rate Trends with NASDAQ
Investment Highlights | 9
market driver - tech sector
The building is located in one of the Nation’s most dynamic
markets. A main driver for this is the technology sector
which provides a dramatic competitive leasing advantage
in retaining and attracting new tenants to the market. In
addition, the building is located within the Silicon Valley
Power grid which provides a lower cost alternative to
nearby neighboring markets with PG&E power by ±30%.
The technology sector is leading a robust market recovery
which is one of today’s most healthy industries. Over the
past 18-24 months, technology companies have made a
significant recommitment to the Silicon Valley fueling the
market’s recovery while outpacing the rest of the West
Region. In the past, technology company growth was
more fueled with speculative capital (i.e. venture capital,
IPO’s, etc), the current technology growth is experi-
enced with companies that have high cash positions
on their balance sheet allowing for and sustainable
more healthy expansion. Detailed below are the current
cash positions of the ten largest, by market capitalization,
technology companies which all have a presence in the
Silicon Valley.
Company
Total Cash
Apple
$76.2B Cisco
$38.9B Microsoft
Google
Oracle
Siemens
IBM
Samsung
Intel
Amazon
$63.7B Market
Capitalization
$330B
$201B
$83B
$35.0B
$158B
$13.4B $85B
$28.8B
$125B
$11.8B $188B
$7.7B $102B
$9.0B
$6.3B $92B
$81B
Silicon Valley’s technology firms will receive a long-
term benefit from recent changes to federal patent laws.
The change will make it easier for a first-time inventor filing
an application to get a patent and lowers costs which will
help technology companies keep their research and development departments in the metro area.
10 | Investment Highlights
corporate concentration
Further validating this location within the Silicon Valley is the number of Fortune 500 and internationally recognized companies
choosing to locate within close proximity to the General Dynamics building. Over the past 15 years, the Office and R&D
market’s vacancy within a two-mile radius of the property has outperformed the greater Silicon Valley market by
nearly 200 basis points.
general dynamics & Corporate bonds
Given the investment security an “A” credit rated company
provides, General Dynamics’ longest maturing bond in 2014 is
currently trading (as of April 2012) above par providing a yield
to maturity of only 0.67% based on the coupon rate of 5.25%.
Furthermore, adjacent are the average price, coupon rate
and yield to maturity for all “A” or better credit rated corporate
bonds maturing in the next four-five years (timeframe in line
with General Dynamics’ lease).
“A” or Better
Credit Rated
Corporate Bond
Avg
Price($)
Avg
Coupon(%)
109.504
4.548
Avg
YTM(%)
2.663
Investment Highlights | 11
In addition to being General Dynamics’ highest grossing
investment grade tenant
The property is 100% leased to General Dynamic’s
Advanced Information Systems Division, a wholly owned
subsidiary of General Dynamics Corp. General Dynamics
is a Fortune 100 company originally formed in 1952
through the consolidation of Electric Boat Company,
division in 2011, IST is also positioned to be its most
significant revenue driver long into the future. The
potential value of General Dynamic’s existing contracts at
the end of the Fourth Quarter 2011 was estimated at over
$22 billion.
Remaining
Sales Value
of Current
Contracts
(Millions)
Estimated
Potential
Contract Value
$9,579
$22,384
Aerospace
$17,907
$0
Marine Systems
$18,504
CONVAIR and several other companies. General
Dynamics now has total revenue in excess of $32 billion
and a workforce of approximately 90,000 employees
throughout its four main business divisions: Aerospace,
Combat Systems, Information Systems and Technology
and Marine Systems. Each of the four business divisions contains several business units:
Information Systems &
Technology
Combat Systems
Information Systems and Technology (Tenant in
Occupancy)
$11,420
$3,453
$2,163
The General Dynamics building location in Santa Clara is
Advanced Information Systems
the company’s only significant location in Northern California
C4 Systems
and only location in the Silicon Valley.
Information Technology
United Kingdom Limited
Aerospace
Gulfstream
3
Jet Aviation
Combat Systems
Armament and Technical Products
European Land Systems
1
Land Systems
Ordnance and Tactical Systems
Marine Systems
Bath Iron Works
Electric Boat
NASSCO
The property is occupied by the Information Systems
and Technology (IST) division, the largest business
division within General Dynamics and is the most
financially significant component of the company. In 2011,
6
2
IST’s revenues exceeded $11 billion and accounted for
over one-third of General Dynamics’ total revenues. This
revenue volume exceeded the next highest grossing division
by almost $2.5 billion.
Information Systems &
Technology
Combat Systems
Aerospace
Marine Systems
% of Sales
2011 Revenue
(Billions)
34.4%
$11.22
27.1%
$8.83
18.4%
20.2%
$5.99
$6.60
4 5
General Dynamics California Locations
2305 Mission College Blvd
8989 Rio San Diego Dr, Suite 345
1 Santa Clara, CA 95054
San Diego, CA 92108
4
± 350K SF
± 10K SF
5933 W Century Blvd, Suite 700
3430 Camino Del Rio
5
2 Los Angeles, CA 90045
San Diego, CA 92108
± 18K SF
±20K SF
4235 Forcum Ave, Suite 200
112 Lakeview Canyon Rd
6
Thousand Oaks, CA 91362
3 McClellan, CA 95652
± 80K SF
±70K SF
12 | Investment Highlights
The Silicon Valley and Santa Clara in particular, is a necessary and strategic location for General Dynamics given that it is the
Information Technology capital of the world and the proximity to related technology companies, clients, educational institutions
and the high-tech workforce. The subject property is General Dynamics only location in the Bay Area.
General Dynamics is a leader in the Aerospace and Defense industry. As the name implies, this industry focuses on the
production, sale and service of commercial aircraft and military weapons and systems. Other companies that operate within
this industry include Boeing, Lockheed Martin, Northrop Grumman, Raytheon Co., and BAE Systems. The industry as a
whole saw year over year revenue growth of almost 3.5% in 2011 with further revenue increases expected in 2012.
secured facility
The property offers one of a few low-profile single structure totaling ±360,000 feet within the Silicon Valley. This is attractive
to General Dynamics because the security and the large floor plates allow General Dynamics to construct several Sensi-
tive Compartmented Information Facilities (SCIF’s), which provides insulation from listening devices which are a critical
function of space design for defense contractors. SCIF’s provide an alternative and secure work environment that mirrors an
employees’ standard work area.
The diversity of space contained within the property is an additional attractive feature for General Dynamics. The property
currently contains office, lab, and warehouse space as well as the unique feature of eight dock high doors for loading. Also,
there are on-site amenities, such as an exercise facility with men’s and women’s showers, cafeteria, and a basketball court.
general dynamics commitment
General Dynamics occupied the building at the beginning of 2006 and have continued to upgrade its space at their cost.
Highlighted below are a few of the recent enhancements General Dynamics has completed.
·
HVAC – General Dynamics replaced eight (8) roof top AC units in 2009, costing the tenant nearly $700,000.
·
Backup Generator – There was a 15 kilowatt generator which General Dynamics replaced to add an 80 kilowatt gener-
·
·
Elevators – there is a total of three (3) hydroelectric units which the third was added by General Dynamics.
ator to support the tenant’s Fire & Safety System as well as a separate generator which supports the fire pump.
Security Systems – The tenant recently replaced all the existing security cameras and now has two (2) separate
card access systems which support the classified area and the general office space.
general dynamics retention
In 2016, it was assumed that General Dynamics would exercise its option to renew based upon the following:
·
Replacement cost rents are projected to be $2.45/NNN which is nearly 18% above the average market rent in 2016.
·
The location’s proximity to the intellectual capital working in the building.
·
·
·
Occupancy Cost – The building is currently serviced by the Silicon Valley Power grid, costs are ±30% less than PG&E.
Secured / Low-Profile Facility – The current location is one of only 10 buildings of 150,000 square foot floor plates or
greater in the entire Silicon Valley that could potentially having the ability to accommodate a ±360,000 square foot user.
Currently, there is no vacancy in any of these 10 buildings.
General Dynamics Specifications – General Dynamics has invested significant capital into the building since taking
occupancy including costly SCIF spaces, labs, backup generators, and security systems upgrades.
Investment Highlights | 13
golden triangle location
The General Dynamics building is located in one of the most desirable areas of Silicon Valley known at the Golden Triangle.
This area is bordered by Highway 101 to the south, Highway 237 to the north and I-880 to the east. Access to these three
primary arterials of the Silicon Valley is crucial to attract the significant pool of intellectual capital throughout the Silicon Valley.
14 | Comparables
1
Tenant / Property / Address
Comparables | 15
2
3
Comparable Lease Transactions
5
Term (Yrs.)
Start
Lease Type
Owner
68,000
$1.80
10
Apr-12
NNN
Irvine Company
2
Apple, Inc
Central Research Park
345 Potrero Ave
Sunnyvale, California
40,976
$1.97
5
Mar-12
NNN
Irvine Company
3
Taradyne
965 West Maude Ave
Sunnyvale, California
20,128
$1.91
5
Dec-11
NNN
Mozart Development
4
Apple
975 Benecia Avenue
Sunnyvale, California
108,712
$2.07
5
Oct-11
NNN
Peery-Arrillage
5
Telenav
Sunnyvale Business Ctr
920-590 Deguigne Dr
Sunnyvale, California
175,010
$1.95
10
Jul-11
NNN
Blackstone/EOP
6
Medarex
Caribbean Corporate Ctr
1320-1324 Chesapeake
Sunnyvale, California
37,226
$2.55
2
Mar-11
NNN
Divco West
7
Rovi Corporation
Airport Technology Park
2830 De La Cruz Blvd
Santa Clara, California
86,785
$1.65
7
Dec-11
NNN
Bixby Land
8
Nividia Corporation
2770 Scott Boulevard
Santa Clara, California
99,800
$1.53
5
Nov-11
NNN
Mission West
9
Huawei Technologies
2890 Scott Boulevard
Santa Clara, California
75,000
$1.93
5
Nov-11
NNN
Mission West
Dell
Towers at Great America
5450 Great America Prky
Santa Clara, California
158,281
11
Ruckus Wireless
350 West Java Drive
Sunnyvale, California
95,826
$1.78
10
Mar-12
NNN
Rockpoint/Presidio
12
Fusion I-O
2880 Junction Avenue
San Jose, California
79,143
$1.60
7
Jan-12
NNN
LaSalle Advisors
13
Microsemi
3850 North First Street
San Jose, California
179,232
$1.71
10
Dec-11
NNN
Sobrato Development
14
MediaTek
2860 Junction Avenue
San Jose, California
61,518
$1.50
7
Nov-11
NNN
LaSalle Advisors
1
10
6
7
8
11
Rate/SF/Mo
Juniper Networks
Central Research Park
324 North Mary Ave
Sunnyvale, California
SF
4
9
12
10
13
14
13
11
10
6
12 14
4
$1.55
10
Aug-11
NNN
Prudential/Harvest
3
1
2
5
9
8
7
16 | Comparables
Comparables | 17
1
2
3
4
5
6
7
Subject Property - General Dynamics
Property
Total NRA (SF)
Year Built
Rate/SF/Mo
Occupancy
Comments
358,503
1979
$1.05
100%
Expires May 19, 2016 - NNN
Lease Structure
General Dynamics Building
2300 Mission College Boulevard
Santa Clara, California
1
Comparable Sale Properties
Property / Address
Bordeaux Centre
1
1380 Bordeaux Drive
Sunnyvale, California
Montague Oaks Business Park
2
611-695 River Oaks Parkway
San Jose, California
Middlefield Crossing
3
675-685 East Middlefield Road
Mountain View, California
Cupertino Crossing
4
10900 North Tantau Avenue
Cupertino, California
Carribean Corporate Center
5
1310-1320 Chesapeake Terrace
Sunnyvale, California
Central Research Park
6
884-919 Hermosa Court
Sunnyvale, California
Oakmead Business Park
7
3333 Scott Boulevard
Santa Clara, California
Total SF
Price (MM)
Cap
Buyer
COE
Price/SF
Rate
Seller
123,842
$41.3
May-11
$333
262,357
$39.3
Jun-11
$150
173,167
$77.5
Dec-11
$448
100,418
$43.5
Dec-11
$433
261,059
$71.0
Feb-12
$272
465,627
$132.0
Sept-11
$283
4.10%
5.00%
6.50%
6.25%
6.60%
$82.33
Jul-11
PSF
(Buildable)
100% Leased to Cortina/PMC-
Ares/
Sierra - Year 1 Increases to 6.3%
Wrightwood
Cap Rate
CarVal/Eagle
87% Leased - Stabilized to 8%
Ridge
Cap Rate After Capital - Single
McCandless
Story Product
Prudential
6
7
(2017) Leased Building - 2-Story
Product
Panaaonic (50% of SF) lease
Union Prop/
expirations in 2015/2017 - Apple
Long Wharft
(50% of SF) through 2021
LaSalle
3
Simens (2023) and Zynga
Alecta
Divco West
2
100% leased
Irvine
5.40%
Company
100% Leased - 8 buildings
Archon
$60.5
Land
AEW Capital
Alecta
5
Comments
N/A
Menlo/Beacon
Planning 735,000 SF Five
Applied
Building Office Campus - $82.33
Material
PSF Land Value
4
Adjacent Owners | 19
Legend
Legend
1. 2305 Mission College Boulevard
(Subject Property)
- Invesco Real Estate
2. 4275-4295 Burton Drive OmniVision Technologies
3. 2250 Agnew Road - OmniVision
Technologies
Fremont
(17 Miles)
880
4. 4251-4255 Burton Drive - PacTrust
5. 4201-4211 Burton Drive - PacTrust
6. 2175 Mission College Boulevard -
iew Alviso
Mountain V
Road
Milpitas
(7 Miles)
880
North 1st Street
PerkinElmer Inc
North 1st Street
7. Mission City Center - PCCP /
South Bay
8. Intel Campus
9. 2051-2151 Mission College
Boulevard - PacTrust
10. Mission Park Executive Center PacTrust
Lafayette Street
11. 1991-1999 Russell Avenue Randall Kent
Lafayette Street
12. 3660 Thomas Road - Marchese
ad
Family Properties
n
Ag
gue
PacTrust
nta
ew
13. Mission Park Business Center -
Ro
Mo
14. 1505-1515 Wyatt Drive - PacTrust
Lakeshore
n Driv
e
ay
sw
16. 1705-1715 Wyatt Drive - PacTrust
Burto
Drive
res
15. 1605-1615 Wyatt Drive - PacTrust
Exp
et
18 | Adjacent Owners
17. 3901-3951 Burton Drive - PacTrust
18. 4008-4008 Burton Drive - PacTrust
19. 4001-4051 Burton Drive - PacTrust
Mission College Boulevard
20. 4101-4151 Burton Drive - PacTrust
21. Oracle Campus
22. 921 Clyde Avenue - Northern Valley
Baptist Church
23. Rivermark Shopping Center
(Safeway, T-Mobile) - Clarion
Partners
24. 3060 North 1st Street - First
Montague Development
25. 3131-3151 Zanker Road - City of
San Jose
26. Montague Park - La Salle Advisors
27. 211-281 River Oaks Parkway Bixby Land Company
28. 5488 Bayfront Plaza - Marvell
Semiconductor Inc
sio
Mis
e
lleg
o
nC
rd
eva
ul
Bo
San Jose
(8 Miles)
20 | Adjacent Owners
Adjacent Owners | 21
Legend
1. 2305 Mission College Boulevard
(Subject Property)
- Invesco Real Estate
2. Bordeaux Centre - AEW Capital
Cupertino
(9 Miles)
Sunnyvale
(6 Miles)
Management
Mountain View
(8 Miles)
3. Java Metro Center - Brookstone
Holdings Inc
4. Intel Campus
North Lawrence Expresswayv
Lawrence Expressway
5. 2201 Laurelwood Road - Vishay
Intertechnology Inc
San Francisco Bay
Mountain View Alviso
Road
Mission College Boulevard
6. Vacant Industrial Land (14AC) Intel Corporation
Great America Parkway
7. 2695 Augustine Drive - Blackstone
Realty Advisors
8. McCandless Towers - Shorenstein
Bowers Avenue
Great America Parkway
Properties
California's Great America
9. Santa Clara Towers - Shorenstein
Properties
101
10. Mission Towers I - Equity Office
11. Mission Towers II - Shorenstein
Properties
12. Santa Clara Marriott
13. Great American Tech Center -
Freedom Circle
Sobrato Development Companies
14. Parkway Tower - ATC Partners
15. Towers at Great America Prudential Real Estate Investors
16. Great American Corporate Center Sobrato Development Companies
17. 2803-2805 Mission College
Boulevard - Kinetic Systems Inc
18. Mission College
19. Mission Corporate Center - Sobrato
Development Companies
20. 3625-3635 Peterson Way - Eaton
Vance Investment Managers
21. Vacant Industrial Land (26 AC) Menlo Equities
22. Mercado Santa Clara Shopping
Center (AMC Theatres, TJ Maxx) Lakha Investments
23. Moffett Field Naval Air Station
24. Mission City Center - PCCP /
South Bay
M
is
si
on
Co
lle
ge
Bo
ul
ev
ar
d
22 | North
Oakland
(40 Miles)
Fremont
(17 Miles)
San Francisco Bay
Mountain View Alviso
880
Road
Tasman Drive
Lafay
ette S
treet
oad
Agnew R
Mission College Boulevard
South
San Jose
(8 Miles)
Sunnyvale
(6 Miles)
Mo
way
press
e Ex
ntagu
101
Fr
ee
Mission College Boulevard
ew
Agn
d
Roa
do
m
Ci
rc
le
East | 23
Fremont
(17 Miles)
San Jose
(8 Miles)
Milpitas
(7 Miles)
North 1st Street
Montagu
e Expre
et
Lafayette Stre
ssway
n
sio
Mis
ad
Ro
eB
lleg
Co
w
ne
Ag
rd
eva
oul
WEST
Cupertino
(9 Miles)
Sunnyvale
(6 Miles)
101
Mountain View
(8 Miles)
Mission College Boulevard
Great America Parkway
California's Great America
Agn
Mis
sion
Col
lege
Bou
leva
rd
ew
Roa
d
24 | Parcel Map
1
104-13-096
Name: General Dynamics (Subject Property)
Owner: Invesco Real Estate
Use: Office-Industrial / 15.78 Ac. / 359K SF
2
104-13-095
Name: Santa Clara Corporate Center
Owner: Omni Vision Technologies
Use: Industrial / 4.96 Ac. / 103K SF
3
104-13-094
Name: Mission Plaza
Owner: Omni Vision Technologies
Use: Industrial / 4.95 Ac. / 101K SF
104-13-088
Name: 4251 Burton Dr
Owner: PacTrust
Use: Industrial / 3.45 Ac / 59K SF
5
104-13-083
Name: 2175 Mission College Blvd
Owner: Tom Arthur
Use: Office-Industrial / 5.7 Ac. / 76K SF
6
104-48-010
Name: 3603 Juliette Ln
Owner: Intel Corporation
Use: Office-Industrial / 823K SF
7
104-13-097
104-13-098
104-13-099
Name: Mission City Center
Owner: PCCP / South Bay
Use: Office / 7.93 Ac. / 236K SF
8
104-40-019
Name: 3900 Freedom Circle
Owner: Public Storage
Use: Office / 25.74 Ac. / 427K SF
9
104-41-030
104-41-031
104-41-032
Name: Great America Technical Center
Owner: Sobrato Development
Use: Office-Industrial / 20.38 Ac. / 236K SF
104-40-034
104-40-035
Name: Mission Towers
Owner: Blackstone / Equity Office
Use: Office / 10.66 Ac. / 204K SF
4
9
Road
9
is
sio
n
Co
3
ll
eg
e
vd
Bl
rica Parkw
ay
w
ne
9
9
1
5
Mission College
Blvd
8
8
ino Creek
10
8
San Tomas
Aqu
10
Juliette Ln
7
Freedom Circle
Great Ame
4
2
Ag
M
10
ino Cr
eek
Description
San Toma
s Aqu
Parcel
Parcel Map | 25
6
7
6
6
7
6
26 | Site Plan
The subject property provides General Dynamics with unique floor plans to accommodate office, research & development,
warehouse, several SCIF’s and lab space as well as the unique feature of eight dock high doors for loading all out of this
facility. There are also on-site amenities, such as an exercise facility, cafeteria and a basketball court. General Dynamics has
invested significant capital into the building since taking occupancy including costly SCIF spaces, labs, backup generators,
and security systems upgrades.
Due Diligence | 27
Due Diligence Item
Leases
Rent Roll
General Dynamics Lease Agreement 05-02-2005
Operating Information
YTD 2012 2012 2011 2010 2009 YTD 2012 2011 2010 -
Income Statement
12 Month Trailing-Income
Statement
Income Statement
Income Statement
Income Statement
Aged_Receivable_Report
CAM Reconciliation
CAM Reconciliation
Physical Information
Site Plan-General Dynamics
Certificate of Occupancy
Title Documents
ALTA Survey
Property Tax Bills
2011/2012 2011/2012 2010/2011 2010/2011 2009/2010 2009/2010 2009/2010 2009/2010 2007/2008 2007/2008 2007/2008 -
Tax Bill
1st Installment Tax Receipt
1st Install Tax Receipt
2nd Installment Tax Receipt
Tax Notice
Tax Approval
1st Installment Tax Receipt
2nd Installment Tax Receipt
2nd Installment Taxes
Property Taxes
Tax Bill
28 | Property Description
Building Square Footage:
358,503 Square Feet / 2 story
Land Area:
15.783 Acres (687,508 SF)
Year Built:
Building Dimensions:
Parking:
Site Coverage:
Floor Area Ratio (FAR):
1979-1985 / Renovated 2005
Approximately 506’ X 300’
860 Stalls – 2.4 Stalls/1,000 SF
32.8% (225,347 SF / 687,508 SF)
52%
Building Systems
Building Construction:
Roof Construction:
Concrete tilt-up perimeter walls with columns supporting the roof structure consisting
of tube steel.
Low slope built-up roofs with silver emulsion coating. The primary roof membrane
consists of 3-ply fiberglass (base sheet and 2-ply sheets). Membrane over ½”
HVAC:
plywood deck. Nine 8’6”x16’ skylights.
Roof mounted Trane package units and boxcar type package units. Units range in
size between 4 and 20 tons for the package units and 40 and 60 tons for the boxcar
Elevators:
Sprinkler System Type:
units.
Two Hydroelectric Units – Serving 1st and 2nd floors and roof. One unit is rated for
4,000 lb capacity. The other unit is rated for 5,000 lbs.
Multi-zone Simplex model 4100 fire alarm control panel and wet sprinkler system.
Building is fully sprinklered fed from two 8” main sprinkler systems. The property is
also serviced with a Peerless model 5AF-10 diesel fire pump rated for 1000 GPM.
Electrical:
Back Up Generator:
There is a 15,000 gallon above ground storage tank on site.
2,000-4,000 amps / 277-480volts 3 phase 4wire
Emergency power provided by an Onan model DFEF-33744 500 KW diesel fired
emergency generator in an ancillary enclosure adjacent to the main building. A
second 15 KW diesel fired generator is located in front of the building for the tenant’s
Foundation:
computer systems.
Reinforced Concrete Slab
Utility Providers
Electricity:
Silicon Valley Power
Gas:
Pacific Gas & Electric
Sewer:
City of Santa Clara
Water:
City of Santa Clara
Fiber Optics:
AT&T
Real Estate Taxes
Assessor Parcel Number:
104-13-096-00
Number of Parcels:
1
County/Reassessment Date:
Santa Clara County / Upon Sale
Property Description | 29
Zoning/Restrictions
Zoning Designation:
Easements/Covenants/
Restrictions:
ML – Light Industrial (City of Santa Clara
None
Flood Zone / Seismic Status
Flood Zone:
The property is shown on the Federal Emergency Management Agency Flood
Insurance Rate Map, Community Panel Number 060350 0001D dated January 20,
1999 as being located in Flood Zones “AH” and “B.”
Flood Zone “AH” (Elevation 20’)
Areas of 100-year shall flooding where depths are between one and three feet.
Flood Zone “B”
Areas between limits of 100-year flood and 500-year flood; or certain areas subject
to 100-year flooding with average depths less than one foot or where the contributing
drainage area is less than one square mile; or areas protected by levees from the
Earthquake Disclosure:
base flood.
Zone 4
Additional Building Information
Interior Finishes/Walls:
Office finish consists of carpeted and vinyl floors, painted gypsum wallboard and
acoustical tile ceilings with recessed fluorescent fixtures. The computer lab areas have
Windows/Doors:
Number of Restrooms:
Lobbies:
raised access flooring. Building includes a full cafeteria with kitchen.
High quality commercial grade aluminum and glass doors and hollow metal steel
service doors. Commercial grade window glazing on each floor.
Multiple sets of men’s and women’s restrooms provided throughout the building.
Larger restrooms at the rear of the building include locker and shower facilities.
Main lobby is double height space with an open stair to the second level.
Improvements include combination of stone tile and commercial grade carpet, painted
Security / Communication
Systems:
Lighting:
gypsum board and wood veneer paneling.
Honeywell security card access system providing cardkey entry control.
Lighting is typically 2x4 T8 recessed and indirect fluorescent fixtures. T12 fluorescent
fixtures in the warehouse area. Motion sensors are provided in various locations for
Design Loads:
Loading Docks:
individual offices.
Vertical design live loads floor 50 PSF / roof 20 PSF.
8 Dock High doors with levelers and rubber bumper surrounds. One lower dock-high
loading door. Three grade level dock doors. Docks have metal roll-up doors ranging in
Amenities:
size between 8’x7’ to 10’x12’.
Basketball court, sand volleyball court, and picnic tables. Enclosed patio area located
along west side of the building.
30 | Cash Flow Analysis
Cash Flow Analysis | 31
Actual
Year 1
7/01/2012
Contract Rent PSF
1
(07/12-06/13)
$12.60
Year 2
(07/13-06/14)
$12.63
Year 3
Year 4
(07/14-06/15)
$12.82
(07/15-06/16)
$13.01
Year 5
(07/16-06/17)
$25.17
$15.15
Year 6
(07/17-06/18)
$25.93
Year 7
(07/18-06/19)
$26.71
Year 8
(07/19-06/20)
$27.51
Year 9
(07/20-06/21)
Year 10
(07/21-06/22)
$28.33
$29.18
Year 11
(07/22-06/23)
$30.06
$18.00
$18.00
$20.70
$22.77
$25.05
$26.80
$28.68
$29.54
$30.42
$31.34
$32.28
$33.24
$27.00
$27.00
$27.81
$28.64
$29.50
$30.39
$31.30
$32.24
$33.21
$34.20
$35.23
$36.29
15.0%
10.0%
10.0%
7.0%
7.0%
3.0%
3.0%
3.0%
3.0%
3.0%
Contract Rent % of Market
70.0%
70.2%
61.9%
57.1%
60.5%
93.9%
90.4%
90.4%
90.4%
90.4%
90.4%
90.4%
Market Rent % of Replacement
66.7%
66.7%
74.4%
79.5%
Market Rent PSF
2
Replacement Rent PSF
3
Market Rent Growth
Cumulative Rollover
Potential Gross Rent
84.9%
88.2%
91.6%
91.6%
91.6%
91.6%
91.6%
91.6%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
$4,517,138
$4,528,490
$4,596,606
$4,664,722
$5,431,141
$9,024,322
$9,295,051
$9,573,903
$9,861,120
$10,156,954
$10,461,662
$10,775,512
$1,107,423
$1,107,423
$1,129,403
$1,151,813
$1,188,765
$1,233,895
$1,266,416
$1,292,752
$1,319,647
$1,347,110
$1,375,154
$1,403,793
Other Revenues
Operating Expense Recoveries
4
100.02%
100.01%
100.01%
100.01%
100.60%
99.47%
100.01%
100.01%
100.01%
100.01%
100.01%
100.01%
$5,624,561
$5,635,913
$5,726,009
$5,816,535
$6,619,906
$10,258,217
$10,561,467
$10,866,655
$11,180,767
$11,504,064
$11,836,816
$12,179,305
100.00%
100.00%
100.00%
100.00%
5
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
6
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
Effective Gross Income
$5,624,561
$5,635,913
$5,726,009
$5,816,535
$6,619,906
$10,258,217
$10,561,467
$10,866,655
$11,180,767
$11,504,064
$11,836,816
$12,179,305
Real Estate Tax Expense
$1,045,000
$1,045,000
$1,065,900
$1,087,218
$1,108,962
$1,131,142
$1,153,764
$1,176,840
$1,200,377
$1,224,384
$1,248,872
$1,273,849
Expense Recoveries of Total Expenses
Potential Gross Revenue
Downtime Allowance
Downtime of Potential Gross Revenue
Physical Occupancy
Economic Vacancy Allowance
Economic Vacancy of Potential Gross Revenue
Economic Occupancy
Real Estate Tax - Special Assessments
Operating Expenses
$4,631
$4,631
$4,770
$4,913
$5,060
$5,212
$5,369
$5,530
$5,696
$5,866
$6,042
$6,224
Insurance Expense
$1,328
$1,328
$1,368
$1,409
$1,451
$1,495
$1,540
$1,586
$1,633
$1,682
$1,733
$1,785
Management Fee Expense
$56,245
$56,359
$57,260
$58,165
$66,199
$102,582
$105,615
$108,667
$111,808
$115,041
$118,368
$121,793
Total Expenses
$1,107,204
$1,107,318
$1,129,298
$1,151,705
$1,181,672
$1,240,431
$1,266,288
$1,292,623
$1,319,514
$1,346,973
$1,375,015
$1,403,651
Expenses PSF
$3.09
$3.09
$3.15
$3.21
$3.30
$3.46
$3.53
$3.61
$3.68
$3.76
$3.84
$3.92
$4,517,356
$4,528,595
$4,596,711
$4,664,830
$5,438,234
$9,017,786
$9,295,179
$9,574,032
$9,861,253
$10,157,091
$10,461,801
$10,775,654
0.2%
1.8%
3.3%
20.4%
99.6%
105.8%
111.9%
118.3%
124.8%
131.6%
138.5%
$80,700
$83,121
$85,614
$88,183
$90,828
$93,553
$96,360
Net Operating Income
Change From Actual
Tenant Improvements
7
$1,792,515
Leasing Commissions
8
Capital Reserve
$71,701
$73,852
$76,067
$78,349
Total Capital Costs
$71,701
$73,852
$76,067
$1,870,864
$80,700
$83,121
$85,614
$88,183
$90,828
$93,553
$96,360
Cumulative Capital Costs
$71,701
$145,553
$221,620
$2,092,484
$2,173,184
$2,256,305
$2,341,919
$2,430,102
$2,520,930
$2,614,483
$2,710,843
Net Cash Flow - UnLeveraged
$4,517,356
$4,456,894
$4,522,859
$4,588,763
$3,567,370
$8,937,086
$9,212,058
$9,488,418
$9,773,070
$10,066,263
$10,368,248
$10,679,294
Debt Service
$2,804,057
1.61
$2,804,057
$2,804,057
$2,804,057
$2,804,057
$2,804,057
$2,804,057
$2,804,057
$2,804,057
$2,804,057
$2,804,057
$2,804,057
1.62
1.64
1.66
1.94
3.22
3.31
3.41
3.52
3.62
3.73
3.84
9
Debt Coverage Ratio
Net Cash Flow - Leveraged
$1,713,299
Cumulative Net Cash Flow - Unleveraged
Cumulative Net Cash Flow - Leveraged
Capitalization Rate - Before Capital
1
$1,718,802
$1,784,706
$763,313
$6,133,029
$6,408,001
$6,684,361
$6,969,013
$7,262,206
$7,564,191
$7,875,237
$8,979,753
$13,568,516
$17,135,886
$26,072,972
$35,285,030
$44,773,448
$54,546,518
$64,612,781
$74,981,029
$85,660,323
$1,652,837
$3,371,638
$5,156,344
$5,919,656
$12,052,685
$18,460,686
$25,145,046
$32,114,059
$39,376,264
$46,940,455
$54,815,692
4.76%
4.77%
4.84%
4.91%
5.72%
9.49%
9.78%
10.08%
10.38%
10.69%
11.01%
11.34%
4.76%
4.76%
4.83%
4.90%
5.60%
9.28%
9.56%
9.84%
10.12%
10.42%
10.72%
11.03%
16.12%
16.78%
Rent based upon triple net recovery structure, reference Page 7 for market support.
Capitalization Rate - After Capital
2 Replacement
cost
rents
Return
on Equity - Before
Capital
assume 9% return on all-in
costs, reference
Page 38 for replacement
cost analysis.
3.61%
3.63%
3.77%
3.92%
Return
on Equity
- After
Capital
3 Annual
rent
growth
underwritten
Equity
Multiple - UnLeveraged
4 Underwrote
100% expense
Equity Multiple - Leveraged
5
$1,652,837
$4,456,894
3.61%Page 7 for market
3.63% support. 3.76%
in analysis, reference
3.90%
1.43x
0.33x
0.40x
0.67x
1.70x
(31.44)%
(14.21)%
(3.69)%
9.99%
100% renewal probability at the May 19, 2016 lease expiration, reference Page 15 for support.
Given the tenant’s credit (“A” S&P Credit Rating), we underwrote a 0% vacancy factor.
7
Upon
underwrote a $5.00
per square foot
refurbishment allowance.
13.08%the rollover we
13.67%
14.25%
14.86%
15.48%
8
9
12.51%
13.05%
13.58% through the
14.13%
14.70%
15.28%
Underwrote
a $0.20
per foot capital reserve
analysis with annual
inflationary growth.
1.57x
1.99x
2.13x
Debt
services based1.70x
on a $47,000,0001.84x
loan at a 4.25% on
a 30 year amortization
schedule. 2.29x
1.93x
2.16x
2.41x
2.66x
2.92x
3.19x
10.10%
10.16%
10.20%
10.23%
10.26%
10.28%
(67.09)%
(37.66)%
(12.96)%
14.81%
14.72%
14.60%
14.48%
14.37%
14.27%
14.17%
$95,000,000
$60,676,585
$61,575,756
$71,784,689
$119,034,775
$122,696,363
$126,377,222
$130,168,540
$134,073,601
$138,095,773
$142,238,633
$264.99
$169.25
$171.76
$200.23
$332.03
$342.25
$352.51
$363.09
$373.98
$385.20
$396.76
Internal Rate of Return - Leveraged
Residual Value PSF
5.31%
recoveries under a NNN lease structure,0.69x
reference Page0.74x
38 for the lease0.90x
abstract.
Internal Rate of Return - Unleveraged
Purchase / Sale Price
5.55%
6
15.88%
32 | Rent Roll
Rent Roll | 33
Suite
Start
Date
Tenant
End
Date
Square
Footage
% of Total
Square Ft
% of Total
Rent
Actual
Monthly
Rent PSF
Monthly
Rent
Market
Monthly
Rent PSF
Actual
Annual
Rent PSF
Market
Annual
Rent PSF
Recovery
Method
General Dynamics Building
100
General Dynamics
May-05 10
Apr-16
Total Available Space:
358,503
100.00%
100.00%
$376,428
$1.05
$1.50
$12.60
$18.00
358,503
100.00%
100.00%
$376,428
$1.05
$1.50
$12.60
$18.00
0
0.00%
NNN
10 April 2016 is the last full month of rent given the lease expires May 19, 2016.
Rent Roll Comments
Suite
100
Tenant
General Dynamics
Rent Roll comments
Initial
Occupancy
May-05
Rent Increases
Date
PSF
May-13
May-14
May-15
$12.79
$12.98
$13.17
Options
Termination
Rights
Underwriting Comments
11 3 - 3 Yr FMV
Assume extends at 100% of FMV with 3% increases and $5/TI.
Option Term
May-16
11 General Dynamics has three (3) remaining options at fair market
value.$25.05
May-17
May-18
May-19
May-20
May-21
May-22
May-23
May-24
$25.80
$26.57
$27.37
$28.19
$29.04
$29.91
$30.80
$31.73
Lease Rollover
Suite
Tenant
Lease Rollover
End
Date
Square
Footage
% of Total
Square Ft
% of Total
Rent
Monthly
Rent
Actual
Monthly
Rent PSF
Market
Monthly
Rent PSF
Actual
Annual
Rent PSF
Market
Annual
Rent PSF
Contract
Annual
Rent PSF
at Expiration
Market
Annual
Rent PSF
at Expiration
Option
Annual
Rent PSF
at Expiration
2016
100
General Dynamics
Total:
Cumulative Total:
Apr-16
358,503
358,503
358,503
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
$376,428
$376,428
$376,428
$1.05
$1.05
$1.50
$1.50
$12.60
$12.60
$18.00
$18.00
$13.17
$13.17
$25.05
$25.05
$25.05
34 | Historical Summary
Base Rent
Operating Expense Reimbursement
2010
Owner’s
Actual
2011
Owner’s
Actual
2012
Owner’s
Budget
Actual
In Place
(07/12)
Initial
Proforma
(07/12-06/13)
$880,265
$731,064
$728,052
$1,107,423
$1,107,423
$0
$0
$0
$0
$4,512,339 $4,402,885 $4,402,885 $4,517,138
GROSS POTENTIAL REVENUE $5,392,604 $5,133,949 $5,130,937 $5,624,561
Downtime
Vacancy Allowance
Real Estate Tax Expense
Operating Expenses
Insurance Expense
Management Fee Expense
Non-Reimbursable
Per SF
TOTAL EXPENSES
Percentage Expense Recovery
Average Occupancy
$12.63
$5,635,913
$15.72
$11,352
$0
$0.00
$0
$0
$0
$0
$0
$877,255
$681,483
$676,615
$1,045,000
$1,045,000
$1,200
$1,270
$1,279
$1,328
$1,328
$4,998
$5,101
$43,597
$5,181
$4,631
Actual
Versus
Proforma
$4,528,490
$0
EFFECTIVE GROSS INCOME $5,392,604 $5,133,949 $5,130,937 $5,624,561
PSF
$3.09
$0.00
$11,352
$0
$0
$5,635,913
$15.72
$11,352
$4,631
$0.01
$0
$2.91
$0.00
$0
$0
$44,242
$44,350
$56,245
$56,359
$0.16
$114
$938,422
$751,182
$744,591
$1,107,204
$1,107,318
$3.09
$114
93.80%
97.32%
97.78%
100.02%
100.01%
$12.63
$11,238
$11,371
$19,085
$2.62
$2.10
$17,167
$2.08
$0
$3.09
100.00%
NET OPERATING INCOME $4,454,182 $4,382,767 $4,386,345 $4,517,357
$0
$3.09
100.00%
$4,528,595
$0.00
$0
Historical Summary – DETAIL
G&A
Per SF
TOTAL OPERATING EXPENSES
Mgmt Fee
Other Professional/Misc
TOTAL NON-REIMBURSABLE EXPENSES
Per SF
2010
Owner’s
Actual
2011
Owner’s
Actual
2012
Owner’s
Budget
Actual
In Place
(07/12)
$4,998
$5,101
$5,181
$4,631
$4,631
$8,635
$9,317
$9,317
$9,317
$9,317
$4,998
$0.01
$2,736
$11,371
$0.03
$5,101
$0.01
$9,768
$19,085
$0.05
$5,181
$0.01
$7,850
$17,167
$0.05
$4,631
$0.01
$7,850
$17,167
$0.05
Initial
Actual
Proforma
Versus
(07/12-06/13) Proforma
$4,631
$0.01
$7,850
$17,167
$0.05
$0
$0
$0
$0
$0
Assumptions | 35
GENERAL ASSUMPTIONS SUMMARY
Actual In Place Date
7/1/2012
Square Footage
358,503
Analysis Period - Start Date
7/1/2012
Vacant Rentable Area (SF) - Current Date
0
Occupancy Level
100.00%
Market Rent Growth (Annual)
15%, 10%, 10%, 7%, 7%, 3%+
Average Lease Term (Years)
10
General Vacancy
0.0%
EXPENSE ASSUMPTIONS SUMMARY
Operating Expense Source
2012 Owner’s ARGUS
Operating Expense Growth Rate (Annual)
3.0%
Property Tax Growth Rate (Annual)
2.0%
Effective Tax Rate
1.100%
Management Fee
1.0%
CPI Growth Rate (Annual)
3.0%
Expense Reimbursement Methodology / Stops
NNN
Annual Capital Reserve (PSF)
$0.20
MARKET LEASING ASSUMPTIONS
Retention Rate
12
Annual Rent Adjustment (Internal to Lease)
Tenant Improvements (PSF)
3%
New
Renewal
Downtime (Months)
100%
$20.00
13
New
Renewal
Weighted Average
PROFORMA DEBT SUMMARY
Interest Rate
Amortization Period (Months)
Origination Date
Proforma Loan Balance
12 Underwrote 100% retention on the May 19, 2016 lease expiration.
13 Upon the rollover we underwrote a $5.00 per square foot refurbishment allowance.
14 Underwrote zero (0) downtime on the rollover.
$5.00
9
14
0
2
4.250%
360
07/01/12
$47,500,000
36 | Replacement Cost
Project Description
Office Use
Building Size:
358,503 Square Feet
Land Area (Gross):
15.783 Acres
Est. Construction Duration:
12 Months
Hard Costs
Site / Off-Site Costs
$5.00
Hard Construction Costs
$100.00
Tenant Improvement Costs
$50.00
Total Hard Costs
Land Value
$42.76
Indirect Costs
Architecture / Engineering
$6.00
Permits / Impact Fees
$7.50
Leasing / Marketing
$7.00
Legal Fees / Title Insurance
3.00%
Developer Fee
5.00%
Other Indirect Costs
4.00%
Real Estate Taxes
1.10%
Construction Loan Origination Fee
1.00%
Construction Loan Interest Carry
6.50%
Total Indirect Costs
Total Estimated Replacement Cost
Developer Minimum Return Requirement
Required Net Income PSF
3% Vacancy Allowance
Adjusted Required Rent PSF
Inflation Rate
Replacement Rents PSF
Year
Rent PSF/Yr
2012
$26.95
2013
$27.76
2014
$28.60
2015
$29.45
2016
$30.34
2017
$31.25
2018
$32.18
PSF
PSF
PSF
$3,437,537
$35,850,300
$17,925,150
$57,212,987
$29,397,820
PSF (Gross)
PSF
PSF
PSF
Of Hard Costs
Of Hard Costs
Of Hard Costs
Effective Tax Rate
Of Loan Amount
Interest Rate 50% Avg. Outstanding
$2,151,018
$2,688,773
$2,509,521
$1,716,390
$2,860,649
$2,288,519
$330,405
$613,418
$2,471,322
$17,630,015
$104,200,000
PSF
$9.59
$100.00
$50.00
$159.59
$82.00
PSF
$6.00
$7.50
$7.00
$4.79
$7.98
$6.38
$0.92
$1.71
$6.89
$49.18
$290.77
9.0%
$26.17
$0.79
$26.95
3.0%
Rent PSF/Mo
$2.25
$2.31
$2.38
$2.45
$2.53
$2.60
$2.68
Year
2019
2020
2021
2022
2023
2024
Rent PSF/Yr
$33.15
$34.14
$35.17
$36.22
$37.31
$38.43
General Dynamics Lease Expiration 2016 - Underwrote in Cash Flow Analysis
Rent PSF/Mo
$2.76
$2.85
$2.93
$3.02
$3.11
$3.20
$25.05 / Yr or $2.09 / Mo rent in 2016 which is significantly below Replacement Cost Rent
GENERAL DYNAMICS Lease Summary | 37
Tenant shall be responsible for and shall pay prior to
delinquency all charges for water, gas, light, heat, power,
electricity, telephone or other communication service,
Tenant:
General Dynamics Advanced Information Systems, Inc., a
Delaware Corporation.
2305 Mission College Boulevard, Santa Clara, California.
Leased Area:
358,503 square foot building plus approximately 15.78 acres
of real property
shall contract for all of the Services in Tenant’s name prior
to the Commencement Date.
Except for the maintenance obligations owed by Landlord
described in the paragraph below, Tenant shall keep and
maintain the Premises in good order, repair and working
caused by Tenant.
Landlord, at Landlord’s sole cost and expense: (i) shall
Expiration Date:
maintain, repair and replace, if necessary, the structural
May 19, 2016
members of the Building, roof (except the roof membrane),
Minimum Rent Schedule:
foundation and structural flooring of the Building; and (ii)
05/11 – 05/12
$1.03/SF/Mo
$370,752.00/Mo.
05/13 – 05/14
$1.07/SF/Mo
$382,104.00/Mo.
$1.05/SF/Mo
$1.08/SF/Mo
$1.10/SF/Mo
$376,428.00/Mo.
$387,781.00/Mo.
$393,457.00/Mo.
Option to Extend:
Tenant shall have three (3) options to extend the term of
the lease for a period of three (3) years each, upon written
notice of not more than nine (9) months and not later than
six (6) months prior to the end of the Term. Rent shall be
payable during the option period according to Fair Market
Rent. The “Fair Market Rent” shall mean generally payable
in the Santa Clara metropolitan area (the “Metro Area”) for
equivalent office buildings of approximately the same
age, quality, size and condition as the Building, the
condition of the Premises as improved, the length of the
Term of this Lease, and all other factors that would be
relevant to a third party tenant desiring to lease the Premises for the extended term.
Building Operating Expenses:
Tenant shall pay as Additional Rent all Taxes, Maintenance
Costs, Utilities and Services, and Insurance that relate to
the Premises.
arrange for Services to be supplied to the Premises and
or replacing any damage to the Premises and the building
May 20, 2005
05/15 – 05/16
on the Premises (collectively the “Services”) and all
conditions. Tenant shall also pay for the cost of repairing
Commencement Date:
05/14 – 05/15
services supplied to Tenant or consumed by Tenant
taxes, levies, fees or surcharges therefore. Tenant shall
Address:
05/12 – 05/13
janitorial service, trash pick-up, sewer and all other
shall be responsible for all latent defects in the Building and
in all other improvements comprising the Premises if Tenant
gives Landlord written notice on or before (180) days after
the Commencement Date; and (iii) shall be responsible
for all damage or destruction caused by earthquakes to
the extent of the proceeds from the earthquake insurance
maintained by Tenant and the deductible amount contributed
by Tenant.
As Additional Rent, Tenant shall pay to Landlord monthly with
its payment of Rent, a management fee in the amount of one
percent (1%) of the Rent payable by Tenant for such month.
Tenant shall maintain, at Tenant’s sole cost and expense,
the following insurance coverage:
a. Property Insurance.
b. Business Income and Other Time Element Insurance.
c. Boiler and Machinery Insurance.
d. Commercial General Liability Insurance.
e. Workers’ Compensation and Employer’s Liability
Insurance
f.
Flood Insurance.
g. Earthquake Insurance.
Cancellation Clause:
Option to Purchase:
Prop 13 Protection:
Right of First Refusal:
None
None
None
None
38 | GENERAL DYNAMICS Lease Summary
Assignment & Subletting:
Use:
of the Premises, without Landlord’s prior written consent.
research and development facilities and laboratories, light
Tenant shall have the right to sublease all or any portion
Tenant may assign Lease only with Landlord’s prior written
consent, unless Tenant assigns Lease to: (i) any business
entity directly or indirectly controlled by or under common
control with Tenant; (ii) successors to Tenant by merger,
consolidation, realignment, reorganization or purchase
of tenant; or (iii) a purchaser of all or substantially all of
Tenant’s assets.
Tenant shall not make any alterations, additions, or improvements (collectively, “Alterations”) to the Tenant Improvements without Landlord’s prior written consent.
Restoration:
Tenant shall not be required to remove or pay for the
removal of the Tenant Improvements or Alterations at the
expiration or earlier termination of the lease.
Tenant may, at its discretion, install machinery and equip-
ment at Tenant’s sole cost and expense. Tenant may remove
said machinery and equipment and shall repair any damage
related to the installation or removal of the machinery and
equipment prior to Lease expiration. All of Tenant’s personal
property and trade fixtures not removed shall, at Landlord’s
election, be deemed abandoned by Tenant.
Tenant shall have the right to install, use, maintain, and
repair communications equipment on the Building and/or
Premises at Tenant’s sole cost and expense.
Tenant may install monument, directional, and building
signage on the Building and/or Premises at no additional
cost to Landlord. Tenant shall remove all signage and repair
any damage related to the installation or removal signage
upon Lease expiration.
including warehousing and storage, shipping and receiving,
high security areas, pilot/model shop areas, training of
Tenant’s employees, employee lunch/break rooms, vending
machines, fitness center, credit union branch, automatic
teller machine kiosk, company store, travel agency and child
care facilities. Tenant shall have access to the Premises
Tenant shall have the right, from time to time, to maintain
Limited Access Areas where Tenant is conducting confiden-
tial or highly-sensitive activities. Tenant shall notify Landlord
in writing of any Limited Access Areas, and shall provide
Landlord a floor plan indicating the location of the Limited
Access Areas.
Tenant shall have the right to maintain certain area within
the Premises as Limited Access Areas, where Tenant is
conducting confidential or highly sensitive activities. Tenant
has an exclusive right to the rooftop.
Estoppel:
10 Business days. (Exhibit G to Lease)
Summary Source:
Lease Agreement, dated May 2, 2005
This summary is provided to assist you with an evaluation
of the property and contains only selected information about
the source documents. The summary should not be relied
upon by prospective buyers or lenders. Interested parties
should independently review and verify each item of due
diligence information after signing the confidentiality agreement associated with this property.
Parking:
For the Term of this Lease and any renewals thereafter,
Tenant, and its employees and invitees shall have the sole
and exclusive right to use all parking on the Premises,
at no additional charge to Tenant. The foregoing notwith-
standing, Tenant acknowledges that the Existing Tenant has
the right to use forty (40) parking spaces during the term of
the Existing Lease.
None
manufacturing and for any other use permitted by law,
twenty-four (24) hours per day seven (7) days per week.
Improvements/Alternations:
Relocation:
The Premises shall be used for the purpose of offices,
Security Deposit:
None
City / County Interviews | 39
Carolyn Walsh – Planner – COunty of Santa Clara
Interview Summary:
Most of the commercial development activities fall within the various City jurisdictions within the County of Santa Clara. Most
of the unincorporated land in the County is designated for agriculture or cattle grazing. With Most of the unincorporated areas
in North San Jose area are primarily Bay Wetlands.
Ruth Shikada – Economic Development officer – City of Santa Clara
(Former Asset Development manager – COunty of Santa Clara)
Interview Summary:
Most of the County of Santa Clara focus has been on moving its assets to private ownership such as land owned in Los Gatos
and Camden areas. There are no county owned properties within the Golden Triangle. Recently the County sold property on
Middlefield Avenue in Mountain View to Four Corners Properties who is looking to complete a redevelopment in November.
Within the City of Santa Clara, most focus within the Golden Triangle has been on the new 49ers Football Stadium that
recently broke ground. The City will be building a parking structure and a substation is being relocated. There will be some
infrastructure work in the area but nothing major such as rebuilding an interchange.
The new NVIDIA Campus has received some entitlements but is not moving forward yet.
The Irvine Company is planning to move forward sooner rather than later on its large Gateway Project. Plans are moving
forward on 2 of the 3 phases for the development of several office buildings. Phase 1 is under construction with 3 buildings,
five stories for a total of 431,000 square feet. Phase 2 has not yet stated and will be 3 buildings, five stories for a total of
450,000 square feet.
The City of Santa Clara owns it owns utilities, Silicon Valley Power which energy mix includes about 25% renewable sources
which allows the City to provide lower cost power alternatives to nearby cities. The City has rebate programs for certain
energy related items. The City offers rebates up to $500,000 for certain Data Center energy efficient system installations. In
addition rebates are available for buildings that meet LEED criteria and exceed the Title 24 energy requirements by at least
10%. However, the City’s biggest incentive is related to the ongoing savings on operating costs for companies locating within
the City limits.
40 | Market Executive Summary
Market
Executive Summary
The General Dynamics building is located within the “Golden Triangle” within the Santa Clara Office/R&D market
which is part of the greater Silicon Valley market. The “Golden Triangle” area incorporates Highway 101 to the
South, Highway 237 to the North and Highway 880 to the East. The asset is located less than 45 miles South of
San Francisco, one of the top leasing and investment commercial real estate markets in the West.
·
The Santa Clara Office/R&D submarket consists of over 33,717,007 square feet with a current vacancy rate of 14.2%.
·
The Santa Clara Office/R&D submarket average rental rate f is currently $1.36 per square foot NNN
·
·
The Silicon Valley market has a total of 221,628,696 square feet of Office/R&D space with only 14% vacancy.
The Silicon Valley Office/R&D market average rental rate is $1.42 per square foot NNN, which is a 12% increase from
First Quarter of 2011
The Silicon Valley is located within the San Francisco Bay Area in Northern California. The region is home to many of
the world’s largest technology corporations. Despite the development of other high-tech economic centers throughout
the United States and the world, Silicon Valley continues to be the leading hub for high-tech innovation and development,
accounting for one-third of all of the venture capital investment in the United States. Geographically, the Silicon Valley
encompasses all of the Santa Clara Valley including the city of San Jose (and adjacent communities), the Peninsula and
the Southern East Bay.
Market Growth Drivers:
·
Job Growth – For 2011, job growth in Silicon Valley approached 4% year-over-year. This job growth rate was more than
·
Wage Growth – Salaries for technology workers in Silicon Valley increased by 2% last year and have increased by more
·
three times that of the national rate.
than 7% since the beginning of 2008. The average Silicon Valley works now earns $104,000.
Information Technology – The Silicon Valley invented the silicon-based integrated circuit, the microprocessor, the
microcomputer, among other key technologies. The region employs about a quarter of a million information technology
workers
·
Quality of Life – The region has an exceptional quality of life, enjoying an attractive climate and an abundance of
·
Educated Work Force – The Silicon Valley and Santa Clara in particular, has long been known as the Information
recreational opportunities.
Technology capital of the world. The area is home to academic institutions such as Stanford, UC Berkeley and Santa
Clara University.
Market Analysis
Section | 41
Market
Analysis
The General Dynamic building is located within the “Golden Triangle” within
the Santa Clara Office/R&D market which is part of the greater Silicon Valley
market. The “Golden Triangle” area incorporates Highway 101 to the South,
Highway 237 to the North and Highway 880 to the East. The asset is located
less than 45 miles South of San Francisco, one of the top leasing and
investment commercial real estate markets in the West.
The Santa Clara Office/R&D submarket consists of over 33,717,007 square
feet with a current vacancy rate of 14.2%. Large technology users gravitate
to the Santa Clara area to remain in the Silicon Valley but have access to
a more cost effective market when compared to the Mid-Peninsula and the
CBD core of San Francisco.
There is a very limited amount of Office/R&D headquarter space available
in the Silicon Valley, which is comprised of Palo Alto, Mountain View, Menlo
Park, Sunnyvale, Santa Clara, North San Jose and Milpitas. The Silicon Valley
Office/R&D market has a total of 221,628,696 square feet of Office/R&D
space with only 14% available as of the end of first quarter 2012.
42 | Market Analysis
Vacancy Analysis
Absorption Analysis
The Santa Clara Office/R&D submarket had a vacancy rate
The Santa Clara Office/R&D submarket experienced a
to 13%, 680 basis points lower than in the Third Quarter of
to 1 million square feet, delivering 380,378 square feet
of 14% at the end of 2011. The current vacancy rate is equal
2003 where is equal to 19.8%. There has been a consistent
increase in leasing velocity by large users wanting to be
located within the Silicon Valley, more specifically the
“Golden Triangle” where the property is located. This
“Upstream” movement has driven down the vacancy rate for
mission critical facilities in the area to just around zero within
the submarket. Some of the key lease transactions in 2011
included Nividia’s renewal of 99,800 square feet at 2770
Scott Boulevard with a lease rate equal to $1.53 NNN and
Rovi Corporation’s renewal of 86,785 square feet at 2830
De La Cruz Boulevard with a lease rate equal to $1.65 NNN,
both in Santa Clara.
positive net absorption since the beginning of 2012 equal
to the market so far in the second quarter this year. The
submarket, through 2011, responded to the areas increasing
demand for space adding over 1.2 million square feet of
positive net absorption. The “Golden Triangle” area of Santa
Clara is positioned to see increased net absorption moving
forward given the velocity of tenant activity in conjunction
with companies looking for high quality assets at competitive
pricing in relation to other submarkets such as Palo Alto
and Menlo Park which on average can exceed twice the
rates in Santa Clara. Projections for 2014 place the vacancy
rate contracting to around 10%, equal to or better than
pre-rescission levels.
The Silicon Valley Office/R&D market currently has a
The Silicon Valley Office/R&D market combined had a net
Quarter of 2006. At the end of the Fourth Quarter 2011, the
of 2011. This gain is one of the strongest recorded in the
13.5% vacancy rate, 340 basis points lower than the First
vacancy rate was 14%. It is estimated with the current rate
of growth, the market should achieve pre-downturn levels of
approximately 10.5% by the first quarter of 2014. The impact
of a vacancy rate of less than 10% will have a significant
relationship on the direction of the Valley’s real estate
market which has not seen a level that low since the second
quarter of 2000 when it was 2.5%. Due to strong demand
in the marketplace the Valley’s Office/R&D vacancy rate has
trended downward over the past six quarters and should
continue to further contract through 2012.
Vacancy rates for select R&D submarket in the Silicon Valley
are listed below:
Submarket Vacancy Rates
1.56%
Palo Alto
Silicon Valley Historical
R&D Vacancy
6%
Mountail View
3Q10
22%
12%
Sunnyvale
1Q11
20%
North San Jose
3Q11
7.36%
13.37%
17.11%
Milpitas
4Q10
Santa Clara
2Q11
4Q11
1Q12
21%
17%
16%
15.50%
13.50%
absorption of approximately 8.5 million square feet during
past 10 years. The market has seen positive net absorption
six out of the past eight quarters. The market has seen an
uptick of over 576,000 square feet from the same quarter
last year.
There is an estimated 9.0 million square feet of tenant
demand within the Silicon Valley Office/R&D market. Of the
9.0 million square feet, 2.6 million in concentrated on the
Santa Clara submarket. Also, of the 9.0 million square feet
of tenant demand, 3.6 million is focused on space greater
than 200,000 square feet. If all of the 9 million square feet
gets absorbed by the market, the effect would reduce the
current available space in Silicon Valley Office/R&D market
by almost one-third.
Market Analysis | 43
Rental Rate ANALYSIS
limited large space
The average rental rate for Office/R&D space in the Santa
The demand for larger tenant Office/R&D spaces creates
which is a 12.5% increase over the First Quarter 2011 levels.
the supply constrained Silicon Valley. Within the “Golden
Clara submarket is currently $1.36 per square foot NNN
Average Rental Rates are projected to increase 10% in
2012 based on recent leasing activity. No new R&D product
will be coming online in 2012, and rental rates have been
trending upward over the past five years. The Santa Clara
submarket will directly benefit from the lack of available
a favorable situation for the few owners with large space in
Triangle” there are virtually no options for corporate HQ
campuses creating a zero capacity submarket. Given market
rents and the cost of building new product, the area will see
limited construction demand for any competitive properties.
space and higher rental rates in surrounding submarkets
Deliveries
construction makes it economically unjustified to build any
pipeline for the Silicon Valley. Over the past 2.5 years,
such as Palo Alto and Cupertino. Also, the current cost of
Currently, there are no R&D projects in the construction
new speculative space in and around the submarket.
minimal square footage was developed within Silicon Valley
The Silicon Valley Office/R&D market average rental rate is
R&D market.
$1.42 per square foot NNN, which is a 12% increase from
A number of office developments are planned in the Silicon
experienced a high water mark equal to $3.20 NNN per
will restart projects that had previously stalled over the past
First Quarter of 2011. The Silicon Valley Office/R&D market
square foot back in 2001. The hyper-activity from the tech
sector surrounding the Silicon Valley this year, in conjunction
with the larger Office/R&D market users looking for new and
expansion space is a positive sign there is steady demand
side implications for increases in rental rates across the
board moving forward.
The majority of the high rent
demand within the Silicon Valley
starts within the Mid-Peninsula
submarkets of Palo Alto and
Menlo Park then begins to
move “Upstream” into the core
Office/R&D submarkets such
as Santa Clara, Sunnyvale and
Mountain View.
Santa Clara Historical
Office/R&D Rents
1Q10
$1.08
2Q10
$1.14
3Q10
$1.11
4Q10
$1.10
1Q11
$1.10
2Q11
$1.17
3Q11
$1.20
4Q11
$1.24
1Q12
$1.32
YTD
$1.36
Valley. As the market continues to improve, more developers
few years. Three large speculate development are planned
and underway for the area and are outlined below:
44 | Market Analysis
speculative Development Overview
Sobrato Development is currently underway with Phase I of Lawson Lane (323,900 SF) in Santa Clara.
The two 5-story buildings are currently under construction and are being completed on a speculative
basis with an estimated delivery date in the third quarter of 2012. Upon completion both buildings will
total 700,000 SF. Phase II will be constructed within fourteen months and will incorporate two-six story
buildings totaling 360,000 SF.
Irvine Company has begun construction on Santa Clara Gateway. Upon completion the total project size
will be 910,000 SF of office space in a campus setting. The buildings are on 41 acres off Great American
Parkway and Highway 237. Work has begun on Phase I which will be three five-story buildings totaling
447K SF. The first three buildings are slated for completion by mid-2013.
Menlo Equities has begun development of 3333 Scott Blvd Santa Clara. The development is a Joint
Venture with Beacon Capital Partners and is a one of last remaining large development sites between
San Francisco and San Jose. The project is zoned for 1.3 million square feet of mid-rise office with
435,000 square feet underway on three buildings.
Institutions & Corporations
desireability of Silicon Valley
The Silicon Valley is home to a vast majority of the world’s
Displaced tenants will heighten the competitive leasing
rate tenants, and owned by corporate users.
Silicon Valley because of the desirability of the area. Silicon
largest institutional investors, leased to national and corpoBelow is a sample of institutional investors own Office/R&D
market buildings within the Silicon Valley area: [Use
Company LOGOS for each]
•
GE Real Estate
•
PacTrust
•
•
•
•
•
RREEF
ProLogis
USAA
TA
Prudential
The following national and corporate tenants lease
Office/R&D buildings within the Santa Clara “Golden
Triangle” submarket: [Use Company LOGOS for each]
•
Apple
•
Applied Materials
•
•
•
•
•
•
Intel
AMD
Hewlett-Packard
Cisco
Google
Oracle
environment in the market as they chose to remain in the
Valley benefits from its access to the resources of the Bay
Area, including direct proximity to technology companies
and venture capitalists, high level academic institutions
Stanford, UC Berkeley and Santa Clara University, the
existing employment clusters located from San Francisco
to San Jose. The Silicon Valley is the geographic epicenter
of the resources that drive the region and as such a
number of Global Companies headquarter there, including
Oracle, Hewlett Packard, Google, Cisco and others. These
companies benefit from the nexus of the area but also the
availability of transit, outstanding amenities and access to
a highly educated and skilled workforce and unparalleled
intellectual capital. The desirability of the Silicon Valley
market will continue to draw large users, like General
Dynamics, and retain the existing large companies, who will
continue to expand their footprint in the market. Relocation
to the market and expansion by current occupants create
continued demand for large space and the minimal supply
of such space will create a very favorable environment for
owners of large spaces.
Market Analysis | 45
highly educated workforce
Silicon Valley and Santa Clara in particular, has long been
known as the Information Technology capital of the world.
Intel, the world leader in the development and production
of the microprocessors that have driven the rapid and
sustained growth of the Information Technology industry
over the last several decades, is headquartered adjacent to
the General Dynamics building.
SIlicon Valley job and wage
growth
The health of the information technology industry and all technology industries in general has created a thriving economy
throughout the Silicon Valley. For 2011, job growth in Silicon
Valley approached 4% year-over-year. This job growth rate
was more than three times that of the national rate.
Silicon Valley Job Growth
This long-standing reputation as the epicenter of the
Information Technology world has attracted the intellectual
capital needed to continue the industry’s growth in Santa
Clara long into the future. Santa Clara, and the Bay Area in
general, has a population with an education level that far
exceeds other major metropolitan areas on the West Coast.
Advanced Degrees
While job growth has been seen throughout the Silicon
Valley, it has been especially competitive for technology
companies. Salaries for technology workers in Silicon Valley
increased by 2% last year and have increased by more than
7% since the beginning of 2008.
The population in Santa Clara that has earned a Master’s
Degree is nearly twice that of any other metropolitan area on
the West Coast. Furthermore, Santa Clara’s population with
Master’s Degrees is more than 520 basis points higher than
the overall San Francisco Bay area.
This highly educated workforce provides Information
Technology companies with a large supply of qualified
potential employees, attracts start-up companies to locate in
Santa Clara and motivates existing companies to relocate to
Santa Clara.
2008
2009
Silicon Valley
0.0%
-1.0%
San Diego
0.0%
-0.6%
Los Angeles
California
0.0%
0.0%
2010
1.8%
2011
7.1%
1.6%
-2.6%
0.5%
0.1%
1.0%
4.1%
4.0%
4.3%
The wage growth seen in the Silicon Valley since 2008 is
300 basis points higher than the statewide rate and 280
basis points greater than the next highest growth rate in
San Diego.
46 | Market Analysis
Stable and balanced economy
Santa clara stadium
The Information Technology is a dominant industry in the
In February 2012, the Santa Clara City Council voted to
only 17% of all occupations there. Since the Silicon Valley
stadium for the San Francisco 49ers located approximately
Silicon Valley but science and engineering jobs represent
experienced a 3.8% growth in jobs in 2011 the entire
economy in the Valley had to expand.
support an $879 million contract to build a new 68,500 seat
one mile north of the General Dynamics building.
One indicator of the long term stability of the local economy
is the historical values of homes prices. From the beginning
of 2004 until the beginning of 2012, home values in Santa
Clara only briefly turned negative compared to 2004 prices.
Home Values
Furthermore, when compared to the major metropolitan
areas of California, Santa Clara is the only market to not see
a relative price decline. This fact reflects the health, stability
and growth of local economy.
When completed the total cost of the project is expected
to be approximately $1.2 billion for the 1.85 million square
foot facility. In addition to the 68,500 seats it will feature 165
luxury suites and 9,000 club seats. It will be designed with
the ability to host a wide range of events including soccer,
college football, motocross, concerts, as well as serve as
a site for future Super Bowls. The project is expected to be
completed in time for the 2014 NFL season.
The addition of a new, multi-purpose stadium to the City of
Santa Clara will serve as a regional draw and further establish it as one of the dominant cities in the San Francisco
Bay Area.
Market Analysis | 47
Information technology
Silicon Valley was the driving force behind the silicon-based
integrated circuit, the microprocessor, the microcomputer,
among other key technologies. The region employs about
a quarter of a million information technology workers.
Silicon Valley was formed as a milieu of innovations by the
convergence on one site of new technological knowledge;
a large pool of skilled engineers and scientists from major
universities in the area; generous funding from an assured
market with the Defense Department; the development
of an efficient network of venture capital firms; and, in the
very early stage, the institutional leadership of Stanford
University.
48 | Maps & Driving Directions
Driving Directions from san jose international airport:
Property Address:
Head Southeast on Terminal Drive
General Dynamics Building
Slight Left to Stay on Airport Boulevard
Santa Clara, California
Continue onto Airport Boulevard
Slight Right to Stay on Airport Boulevard
Turn Left to Merge onto CA-87N towards US-101N
Take Exit 392 to Merge onto Montague Expressway
Turn Left onto Mission College Boulevard
Miles: 5
Approximate Drive Time: 10 Minutes
2305 Mission College Boulevard
621 Capitol Mall, Suite 2100 • Sacramento, California 95814
(916)446-8274 • www.palmercapital.com