For Sale: Park Place Medical: Offering Memorandum Now Available

Park Place Medical

Park Place Medical – Vallejo California

Home To: Holliday Fenoglio Fowler, L.P. acting by and through Holliday GP Corp. a California licensed real estate broker, California License Number 01385740 (“HFF”)

HFF, an exclusive advisor, is pleased to present the opportunity to acquire the 100% fee simple interest in Park Place Medical (the “Property”), a 57,704 rentable square foot medical office building plus a 4-acre adjacent land parcel, that may be acquired separately or as part of the overall offering, with the ability to develop an additional ±60,000 square foot Class A medical building. Park Place Medical is strategically located less than a 0.5 mile walk from the 248-bed Kaiser Permanente Vallejo Medical Center in the rapidly expanding market of Vallejo, CA. The Property is 94.0% leased to 3 tenants with substantial credit tenancy in Kaiser Permanente (Fitch: A+) and overall average in-place rents 22.9% below market. Park Place Medical provides an investor with stable and dependable cash flow, as well as future income enhancement via below market rents in the midst of rapidly improving market fundamentals.

Superior Location in San Francisco’s North Bay

Park Place Medical is located in San Francisco’s North Bay, situated less than 0.5 miles from the 248-bed Kaiser Permanente Vallejo Medical Center, part of the Kaiser Foundation Health System and 1.5 miles from the 102-bed Sutter Solano Medical Center, part of the Sutter Health System.

Long-Term Tenant Committment and Substantial Tenant Capital Investment

A tenant at Park Place Medical since 1990, Kaiser Permanente is anticipated to spend an estimated $4 million ($86 per square foot) on their leased space, placing Park Place Medical amongst the top-quality medical office buildings in all of San Francisco’s North Bay market. Kaiser Permanente recently executed a new 10-year lease, expanding into an additional 8,169 square feet, affirming their long-term commitment to the property.

Superior MOB and Market Fundamentals

The Property is located in Vallejo, a submarket of the greater North Bay, where the competitive medical office vacancy rate is just 3.8%. Concurrently, rental rates have increased 5.8% year-over-year as the availability for large blocks of medical office space continues to shrink.

Real Estate vs. Credit

The credit and strength of Kaiser Permanente offers the unique ability to acquire a hard real estate asset with the same credit, but more attractive yields than company traded bonds. Approximately 81% of the NRA is occupied by credit tenancy with a weighted average remaining lease term of 6.1 years. The Property is located in San Francisco’s North Bay along the major thoroughfare, North Broadway Street, with 18,479 Average Daily Traffic (ADT). Park Place Medical offers close proximity to two major medical centers including the 248-bed Kaiser Permanente Vallejo Medical Center, the city’s largest acute-care facility, within a 0.5 mile walk and the 102-bed Sutter Solano Medical Center, part of the greater Sutter Health System, within 1.5 miles of the Property. Originally constructed in 1990, Park Place Medical is an institutional quality, multi-tenant medical office property that features ample surface parking (4.16:1,000 SF) with high-profile visibility on North Broadway Street and convenient access to major commercial, residential, and healthcare development. The interior and exterior construction and improvements are aesthetically exceptional with Kaiser investing a substantial amount of capital within their space, significantly increasing their likelihood of retention.

Park Place Medical offers investors the rare opportunity to acquire a stabilized medical office property with additional upside potential via below market rents in the midst of rapidly improving market fundamentals and developable land in a desirable medical office market benefiting from a vacancy rate of 3.8%. The Property also offers an investor the opportunity to increase revenue and capture the surging market momentum through the lease up of the remaining vacancy, as well as the additional upside of increasing lease rates upon rollover with 79.8% rolling through 2020 at rents 32.1% below market at expiration.

Property Overview

  • Property Address: 1761 North Broadway Street, Vallejo, CA 94589
  • Size: 57,704 rentable square feet
  • Percent Leased: 94.0% [1]
  • Year Built: 1990
  • Site Area: 3.20 Acres (Separate 4-acre development site)
  • Parking Ratio: 4.16 : 1,000 RSF
  • Floors: 2
  • Weighted Average In-Place Rent (FSG/Month): $1.76 [2]
  • Weighted Average Market Rent (FSG/Month): $2.16
  • Percent Below Market Rent (Current): 22.9%

[1] Pending LOI for 1,700 SF would increase % leased to 96.9%.
[2] Includes renewal terms anticipated for Solano Diversified Services.

Key Investment Highlights

Direct Proximity to Two Major Hospitals

Park Place Medical is positioned less than 0.5 miles from the 248-bed Kaiser Permanente Vallejo Medical Center and 1.5 miles from the 102-bed Sutter Solano Medical Center

Strong Credit Tenancy 

Kaiser Permanente (Fitch: A+) occupies 81% of the net rentable area and is investing a substantial amount of capital into their space

Significant Upside Upon Lease Expiration

With 79.8% of the net rentable area expiring through 2020 at rents averaging 32.1% below market at expiration, the Property offers the opportunity to increase cash flow in a medical office market benefiting from a robust recovery period

Job Growth Driving the Market

Significant employment growth in the San Francisco-Oakland-Fremont MSA of 16.1% over the past five years – nearly “2x” the national growth rate for the same period

Efficient Floor Plates

Boasting average floor places of ±28,852 rentable square feet, Park Place Medical allows for both full floor and multi-tenant layouts with various tenant sizes that are especially desirable amongst today’s medical office space users

Excellent Historical Occupancy

Since 2006, Park Place Medical has maintained an impressive average occupancy rate of 93.1%, consistently outperforming their direct competition, which has a long-term average direct vacancy rate of 8.5%

Future Development Opportunity to Capture the Continued Growth of San Francisco’s North Bay Medical Office Market

The current offering allows for an investor to separately or collectively purchase the land adjacent to Park Place Medical, entitled for ±60,000 square feet of medical office. ‚

A new medical office development would enable an investor to offer one of the few large blocks of medical office space in San Francisco’s North Bay and likely achieve a premium in rent.

New ownership has the opportunity to potentially capitalize on the continued expansion of Kaiser Permanente at rapidly rising rents in the market. ‚

An investor could offer a buildto-suit opportunity for Kaiser Permanente who has already expressed an interest in expanding as well as other logical medical tenants with nearby operations including Sutter Health System, St. Helena Hospital Center for Behavioral Health, Clinica De La Raza and several more.

Direct Proximity to Two Major Hospitals

Park Place Medical’s location less than 0.5 miles from the Kaiser Permanente Vallejo Medical Center is essential for Kaiser Permanente (81% of NRA) to have proximity to their main patient base. Furthermore, the 102-bed Sutter Solano Medical Center is only 1.5 miles from the Property.

  • Kaiser Permanente Vallejo Medical Center was awarded the Gold Seal of Approval by the Joint Commission, considered the most rigorous in the industry, for quality, safety of care, and other accreditation requirements.
  • The Property is located just blocks from the Sutter Solano Medical Center, part of the Sutter Health System, who received straightA’s for patient safety and recently expanded their women’s health services.
  • Additionally, the St. Helena Hospital Center for Behavioral Health, Clinica De La Raza, Meridian Physical Therapy, and the Planned Parenthood – Vallejo Health Center are located within 2.5 miles and provide other prime candidates for build-to-suit opportunities.

In addition to the substantial improvements Kaiser is planning for their current space, current ownership has invested $500,000 in property upgrades in the
past 12 months.

These upgrades significantly reduce the need for future capital outlays and further solidify Park Place Medical as one of the premier medical offices in San
Francisco’s North Bay.

Strong Credit Tenancy

Approximately 81% of the Property’s NRA is leased to excellent credit tenancy in Kaiser Permanente (Fitch: A+), the largest managed care organization in the United States with 9.6 million health plan members, 174,415 employees, 17,425 physicians and 38 medical centers.

Critical Location

Maintaining a presence near the Kaiser Permanente Vallejo Medical Center is critical to Kaiser Permanente’s main client base. The job growth within the region has led to an influx of new customers in Northern California, rapidly becoming Kaiser’s largest membership region.

Health Plan Membership by Region*

  • Southern California 3,814,943
  • Northern California 3,628,380
  • Colorado 626,523
  • Mid-Atlantic States (VA, MD, DC) 530,275
  • Northwest (OR, WA) 504,403
  • Georgia 259,834
  • Hawaii 231,836

*as of December 31, 2014

Long-Term Tenant Commitment

In occupancy for more than 25 years, Kaiser Permanente has expanded and extended their lease at Park Place Medical on multiple occasions. With a weighted average remaining lease term of 6.1 years, Kaiser Permanente offers stable and dependable cash flow, coupled with rent escalations that will offer investors a growing return.

The tenant’s high probability of retention is further demonstrated by Kaiser Permanente’s substantial capital investment, anticipated to be approximately $4 million ($86 per square foot) that will go towards improving their existing space over the next eighteen months.

Financial Overview

2014 Company Performance Review

  • Operating revenue increased by 6.2% to $56.4 billion in 2014
  • Operating income increased by 22.2% to $2.2 billion in 2014
  • Total membership grew by over 510,000 members in 2014 to approximately 9.6 million members
  • The Company completed facilities in Oakland, Redwood City, and San Leandro in 2014
  • Kaiser Permanente ranked No. 1 in Customer Loyalty according to Satmetrix 2015 study

Outlook (Citigroup Research)

  • Citigroup research shows that while all the other health insurers on California’s Obamacare exchange will raise their rates for 2015, only Kaiser Permanente plans to lower them.
  • Citigroup anticipates the drop in premiums by Kaiser will draw additional customers away from the other providers, raising rates by an average of more than 5%.
  • The Company will open a new health IT campus in midtown Atlanta by 2019, bringing Kaiser’s total presence in Georgia to more than 4,000 employees and physicians.

Tenant Expansion Flexibility and Higher Retention

Kaiser Permanente has exceptional contiguous expansion paths within the Property to provide for longterm growth and retention. Kaiser has expressed interest in expanding into the remaining vacant space. Furthermore, new ownership has the opportunity to potentially capitalize on the continued expansion of Kaiser Permanente at rapidly rising rents in the market by offering an adjacent build-to-suit opportunity, creating a “campus” atmosphere typical of large companies in San Francisco.

Job Growth Driving the Market

Since 2009, the San Francisco-Oakland-Fremont MSA employment market added more than 346,000 jobs, driving unemployment down to 4.5%, compared to statewide unemployment of 6.7%, and national unemployment of 5.5%.

Significant San Francisco-Oakland-Fremont employment growth of 16.1% over the past five years – nearly “2x” the national growth rate for the same period

Significant Upside Upon Lease Expiration

Park Place Medical provides an investor the opportunity to acquire a high-quality, welllocated medical office asset and significantly enhance value as contract rents roll to market. With 79.8% of the net rentable area expiring over the next five years at rents averaging 32.1% below market at expiration, the Property offers the opportunity to significantly increase cash flow in a desirable medical office market.

Investment Advisors

Evan Kovac
Managing Director
858.812.2365
ekovac@hfflp.com
CA Lic. #01750736

Steven Golubchik
Senior Managing Director
415.276.6083
sgolubchik@hfflp.com
CA Lic. #01712816

David Dokko
Associate Director
415.276.6926
ddokko@hfflp.com
CA Lic. #01960806

Kara Mathis, CFA
Senior Real Estate Analyst
858.812.2356
kmathis@hfflp.com
CA Lic. #01924947

Capital Markets Advisors

Aldon Cole
Senior Managing Director
858.812.2344
acole@hfflp.com
CA Lic. #01457351

Jordan Angel
Director
415.276.6942
jangel@hfflp.com
CA Lic. #01419993

Holliday Fenoglio Fowler, L.P. acting by and through Holliday GP Corp., a real estate broker licensed with the California Department of Real Estate, License Number 01385740. ©2015 HFF and HFFS (HFF Securities L.P.) are owned by HFF, Inc. (NYSE: HF). HFF operates out of 22 offices nationwide and is a leading provider of commercial real estate and capital markets services to the U.S. commercial real estate industry. HFF together with its affiliate

HFFS offer clients a fully integrated national capital markets platform including debt placement, investment sales, equity placement, advisory services, loan sales and commercial loan servicing. For more information please visit hfflp.com or follow HFF on Twitter @HFF.

HFF has been engaged by the owner of the property to market it for sale. Information concerning the property described herein has been obtained from sources other than HFF and we make no representations or warranties, express or implied, as to the accuracy or completeness of such information. Any and all references to age, square footage, income, expenses and any other property specific information are approximate. Any opinions, assumptions, or estimates contained herein are projections only and used for illustrative purposes and may be based on assumptions or due diligence criteria different from that used by a buyer. Buyers should conduct their own independent investigation and rely on those results. The information contained herein is subject to change.

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