Boston Properties Seals Deal for Full Ownership of 1.12M SF Santa Monica Office Park

Boston Properties has recently completed its acquisition of the remaining 45 percent stake in the Santa Monica Business Park, solidifying its position as the sole owner of the expansive office complex in Santa Monica, California. With a total area of 1.12 million square feet, this acquisition marks the third instance where Boston Properties has taken over its partners' interests in an office building.

Prior to this, Boston Properties secured full ownership of 901 New York Ave., a prominent office building in Washington, D.C., encompassing 548,425 square feet. The REIT also increased its stake in 360 Park Ave. South, a distinguished property in Manhattan, to 71.11 percent, maintaining its dedication towards expanding its real estate portfolio.

Notably, in both cases, Boston Properties shouldered its partners' share of the properties' debts without significant financial obligations. This astute business strategy allows Boston Properties to enhance its presence in key markets while minimizing financial risks.

A Lucrative Investment

In a strategic move, Boston Properties and CPPIB, the administrator of Canada's national retirement system, have acquired a stake in the Santa Monica property. This prime location, situated near the bustling Santa Monica Airport, boasts an impressive 88 percent occupancy rate. The transaction, valued at $38 million, grants them ownership on a fee-simple basis, including the valuable land itself.

This acquisition showcases the immense potential of the property, priced at $395 per square foot or a total of $467.13 million. Such a valuation offers a lucrative deal to the investors, with an initial capitalization rate of 9 percent. It is important to note that the acquisition also includes $20 million in working capital.

Notably, this venture builds on Boston Properties and CPPIB's successful partnership. In 2018, the two entities made waves in the real estate world by jointly purchasing the Santa Monica Business Park, consisting of 21 buildings, for a staggering $616 million. This monumental deal was primarily financed through a $300 million loan from a consortium of banks led by JPMorgan Chase Bank.

The loan itself came with a fixed interest rate of 4.063 percent thanks to an interest-rate swap agreement. This financing arrangement, coupled with the investors' astute decision-making, positions them for success in the vibrant Santa Monica market.

A Unique Opportunity for Transformation and Growth

Set upon a vast expanse of 47 acres, the property at 2850-3420 Ocean Park Blvd presents an intriguing prospect for revitalization. Although a substantial portion of the land is currently subject to a 75-year ground lease, Boston Properties holds an option to purchase the fee interest, or ground, starting in 2028, with subsequent opportunities arising every 15 years.

In light of recent developments, it is evident that the property's allure has not waned. One of its major tenants, Snap Inc., recently renewed its lease for an impressive 467,000 square feet of space, solidifying its presence until 2036.

This expansive area, known as the Santa Monica Business Park, has captured the attention of Owen Thomas, Chairman and CEO of Boston Properties. In a recent call with analysts, he expressed the company's keen interest in exploring the diverse possibilities offered by this unique redevelopment opportunity. As the maturity of the existing loan looms next year, there is an inclination to negotiate an extension that would enable Boston Properties to acquire the majority of the property's underlying ground.

A New Approach to Property Ownership

Embracing a fresh perspective, the company is looking to enhance the economics of its property by taking a bold step - acquiring the fee interest. By doing so, they hope to revolutionize their financial situation, straying away from the constraints imposed by the above market-rate payments associated with the ground lease. This strategic move would not only provide them with greater refinancing options but also grant access to the unsecured notes market.