1375 Kings Highway East is a 29,500 square foot, Class B office building with 120 parking spaces located on a site of 1.57 acres in Fairfield, Connecticut.  It was purchased in June 2004 as part of a two-building portfolio (along with 777 Commerce Drive) for $3.9 million.  Total project cost was $5.5 million.  It was sold in December 2007 for $7.8 million.

.Market Opportunity
Although fairly new and in reasonable physical condition, the building required an extensive cosmetic renovation, as the former owner would not invest in either tenant or common area improvements.  As a result, most leases were relatively short-term and below market, providing upside potential.  Most significantly, the building is located in an area of rapid transformation and growth, with a new Metro North railroad station and major mixed use development planned adjacent to the site and a high-priced condominium project successfully developed across the street.  These factors were expected to substantially increase the desirability of the location and the achievable rents.

.Acquisition
CCGL bought the property from its original developer, who was approaching retirement and was unwilling to invest the capital required to maximize the benefit of the property’s emerging location.  The property was acquired, along with 777 Commerce Drive, in June 2004.

.Results
CCGL completed an extensive interior renovation and leased the building up to over 96% within two years of acquisition, from approximately 60% shortly after closing.  After three years, CCGL was approached to sell the building at an attractive price of $235 per square foot.  The sale closed in December 2007.

The building was owned 62.5% by CREF II and 37.5% by a related entity, which acquired its interest as part of a tax deferred exchange after the sale of 14 Mamaroneck Avenue in White Plains.  The effective annual internal rate of return to the CREF II investors was 12.3%, net after all fees and carried interest to CCGL and its affiliates.

The yield on this investment was adversely impacted by the financial dislocations which began in the Summer of 2007, when the sale was under contract.  In the face of those dislocations, CCGL agreed to a modest price reduction, electing to take a profit in a deteriorating market.

Approximately 75% of the investors in both CREF II and the related entity elected to engage in a tax-deferred exchange into another property.  As the market continued to deteriorate, CCGL elected not to complete a tax-deferred reinvestment, as it could not secure a replacement property meeting its stringent acquisition criteria.  Proceeds of the sale were distributed in mid-2008.  Much of those proceeds have been informally committed to CREF IV.