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Core Plus

Core Plus assets are properties that are otherwise Core assets, but with some component of risk (opportunity) attached to it. It may be a high street retail building with a tenant that takes 10% – 15% of the space vacating in 2 years and the space needs to be upgraded and re-leased. Or it could be an otherwise Core office tower located a bit outside of the prime office submarket with a lease or two that is a bit below market. A levered IRR for this risk profile could be between ~8% to ~13%.

The Four CRE Risk Profiles

Putting ‘Core Plus’ in Context

Scenario:

Crestview Partners, a real estate investment firm, has identified an opportunity to acquire Park Central Office Tower, a 220,000-square-foot suburban office building located in Dallas, Texas. The property is currently 90% leased with a mix of tenants ranging from professional services to tech startups.

Property Details:

  • Location: Suburban Dallas, Texas
  • Size: 220,000 SF
  • Occupancy Rate: 90%
  • Year Built: 2001
  • Purchase Price: $44 million
  • Current NOI: $2.7 million

Investment Opportunity:

Park Central Office Tower is classified as a Core Plus investment due to several factors. While the property is relatively well-maintained and situated in a growing suburban market, it presents certain risks that differentiate it from a typical Core asset:

  • Lease Expiration Risk: A major tenant, occupying 12% of the building, has a lease that is set to expire in 18 months. The current lease rate for this tenant is below market, providing an opportunity for Crestview Partners to increase rents upon renewal or to re-lease the space at market rates, which are approximately 15% higher.
  • Deferred Maintenance: While the building is in good condition overall, there are some deferred maintenance items, including a $500,000 capital improvement plan to upgrade the HVAC system and modernize the lobby. These upgrades are expected to enhance the building’s appeal and support higher rental rates.
  • Location Dynamics: Although the property is in a desirable suburban area, it is not in the prime business district of Dallas. However, the area is experiencing an influx of businesses due to lower rents compared to downtown, making it a potentially lucrative investment as more companies seek affordable office space outside the city center.

Financial Projections:

Given these factors, Crestview Partners projects a levered IRR of 11% over a 5-year hold period. The plan includes renewing or re-leasing the major tenant’s space at market rates, completing the necessary capital improvements, and maintaining a high occupancy rate.

Core Plus Characteristics:

  • Opportunity for Rental Growth: By re-leasing the below-market space at higher rates, Crestview Partners can increase the property’s NOI, thereby boosting the overall value of the asset.
  • Moderate Risk: The risk associated with lease expiration and the need for capital improvements places this investment in the Core Plus category, as it offers a balance between stability and the potential for value creation.

Frequently Asked Questions about Core Plus Real Estate Investments

Core Plus assets are properties that are otherwise Core assets but with some component of risk (opportunity) attached to them. For example, this might be a building with near-term lease expirations or one that requires some capital upgrades. These risks create the potential for enhanced returns.

Core Plus properties share many characteristics with Core assets—such as being stabilized and well-maintained—but include elements of risk, like upcoming lease expirations or under-market rents. Core assets are typically lower risk with fully stabilized occupancy and minimal capital needs.

A levered IRR for Core Plus investments is typically in the range of ~8% to ~13%.

The property is relatively well-maintained and located in a growing suburban market, but it carries some risk factors such as a major tenant lease expiring in 18 months, deferred maintenance requiring $500,000 in improvements, and its location outside the prime business district. These factors provide opportunities for value creation, which qualifies it as a Core Plus asset.

Risks include: (1) a major tenant occupying 12% of the building with a lease expiring in 18 months, (2) the lease rate for that space is currently below market, and (3) $500,000 in deferred maintenance is needed to upgrade the HVAC and modernize the lobby.

By renewing or re-leasing the expiring space at market rates (which are approximately 15% higher), and completing improvements, the investors aim to increase the property’s NOI and overall value.

Crestview Partners projects a levered IRR of 11% over a 5-year hold period.

Location affects classification when the property is not in a prime area but still has strong market fundamentals. For Park Central, its location outside downtown Dallas—but in a growing suburb attracting new businesses—adds both risk and opportunity, contributing to its Core Plus status.

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