Retail Center Sells Despite $32M Encumbrance

Plaza El Paseo is occupied by a diverse mix of tenants.

Plaza El Paseo is occupied by a diverse mix of tenants.

RANCHO SANTA MARGARITA, CA— has learned exclusively that K&G El Paseo 1 & 2, LLC has sold Plaza El Paseo at Rancho Santa Margarita Town Center, a legacy-qualityshopping center here, for $56.6 million to Plaza El Paseo Center, LLC. The center, which totals approximately 107,000 square feet of building area and is occupied by a diverse mix of tenants, was sold despite a $32-million encumbrance.

Built in 2002 and situated on 10.56 acres at the corner of El Paseo and Alma Aldea, the asset is anchored by Bed, Bath & BeyondBevMo and Wood Ranch BBQ. It is centrally located within the 1-million-square-foot Santa Margarita Town Center, one of the region’s most successfulmaster-planned retail developments, and is adjacent to Kohl’s and the Rancho Santa Margarita City Offices.

Faris Lee Investments’ president and CEO Rick Chichester, along with the firm’s Nicholas Cooand Chris DePierro, created the comprehensive deal strategy on behalf of both the seller and the buyer. Chichester notes that the deal presented multiple challenges from a financing perspective. “Plaza El Paseo was encumbered by a $32-million conduit loan featuring an above market interest rate. This encumbrance had limited the buyer pool when previously marketed by a different firm and therefore demanded a more creative strategy to meet the seller’s objectives.”

DePierro adds, “Our strategy involved having the buyer assume the existing loan—thus saving the seller more than $6 million in defeasance penalties. It also required more than $24 million in cash to the existing loan—significantly more equity than is typical for similar assets subject to new financing.”

In order to overcome this challenge, Faris Lee created a business plan around Plaza El Paseo. The plan provided a strategic vision that focused on creating value through upgrading tenancy to appeal to the area’s higher-end demographic as current leases expired.

Faris Lee also advised on the hiring of a new leasing team to market to potential new tenants, as well as on appointing a new property-management group to further implement the business plan. This process generated promising new tenant activity and a vision for long-term success and stability, despite losing tenants during the escrow period.

Faris Lee says although the typical buyer for an asset of this class would have beeninstitutional, due to the existing financing obstacles, the firm targeted a sophisticated private buyer pool and marketed heavily to its proprietary database of high-net-worth individuals,family offices and 1031-Exchange buyers. The campaign garnered significant interest, and a private buyer was identified.

The buyer embraced the new vision for the center, and was willing to assume the loan. However, his equity was tied up in several multifamily investments throughout Southern California, creating a new level of challenge for the senior team at Faris Lee, says Coo. “With a qualified buyer ready to take on this rare opportunity, Faris Lee created a complex escrow structure that enabled the buyer to secure the required equity by selling several of his apartment assets during the escrow process. The proceeds from the apartment sales were then used to infuse the necessary equity into Plaza El Paseo as the upleg in a 1031-Exchange transaction.”

The sale of Plaza El Paseo generated a cap rate of 5.39%, a cash-on-cash yield of 3.74% and a price per square foot of $550.

As reported in February 2015, Plaza El Paseo was one of a portfolio of three retail properties here that were brought to market by CBRE’s Orange County office in Newport Beach.

At the time, the Rancho Santa Margarita Portfolio was 99% occupied by national and local tenants and came with an asking price of $103.3 million. has learned that Faris Lee took over the listing after CBRE didn’t complete the sale. Faris Lee sold the Las Flores Walgreens property for $13.9 million in November 2015. The other property in the portfolio, Santa Margarita Marketplace, was taken off the market by the ownership since they are re-tenanting and upgrading the property.


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