Lexington JV Buys Office for $232 Per SF

The office building is leased to Motel 6 Operating, LP under a modified gross lease through July 31, 2015. The obligations of Motel 6 Operating, LP under the lease are unconditionally guaranteed by Accor, S.A. In connection with the acquisition, Lexington's joint venture partner obtained non-recourse first mortgage financing in the original principal amount of approximately $20.8 million. The 5.27% loan matures on July 1, 2015.

The deal raised the eyebrows of a top Dallas investment broker, who spoke to GlobeSt.com on the condition of anonymity. He is familiar with the area, but learned of the sale from GlobeSt.com. "They paid $232 per sf," he tells GlobeSt.com. "That is huge. I know in today's markets people are paying outrageous amounts of money for buildings, but this deal doesn't make any sense to me. I assume they have a single tenant in a long-term lease in a class A building. But that is not a class A market." He says the office vacancy rate in the area is hovering around 22% to 23%.

For comparison, he notes that Metropolitan Life recently bought a class A building in the Uptown area, "which is the hottest area in Dallas. MetLife paid about $230 per sf, which was stretching a little bit, but made some sense because in that market they can expect some appreciation."

Lexington didn't disclose the cap rate it paid for the deal, but the broker says he would be curious to know it. "I did a deal recently that had four tenants, and they were all A-plus credit tenants," the broker tells GlobeSt.com. "It sold for a 7.7% cap at about $150 per sf and that was a class A building in a class A market."

He says Lexington, which could not be reached for comment, may have bought the building based on the cash flow from the guaranteed 10-year lease. But he tells GlobeSt.com that the deal would make more sense if the tenant had a 15-year or 20-year lease, "and then it could be more of a financing deal and not a real estate deal." On the other hand, if Lexington's plan is to hold the building for five to seven years and than sells it for a moderate profit, the deal makes sense, he says.

And with 8.2 acres, he says there could be a development opportunity, although he says it's questionable whether there is a need for another office building in the submarket in the near future. In markets with high vacancy rates, typically the only construction is for build-to-suits, as developers have trouble obtaining loans for spec offices.

Carrollton, with a population of 116,500, is the ninth largest city in the Dallas/Fort Worth metropolitan area. The average household income in the city is $74,430.