777 Commerce Drive is a 59,500 square foot Class B office building with 230 parking spaces located on a site of 3.06 acres in Fairfield, Connecticut.  It was acquired in June 2004 as part of a two-building portfolio (along with 1375 Kings Highway East) for $7.65 million.  Total project cost was $10.2 million.  It was sold in December 2007 for $12.9 million.

.Market Opportunity
The building was developed as a single tenant light industrial building in an area that was then primarily industrial.  When the original tenant relocated, the developer partially retenanted the building with two quasi-industrial tenants, but did not attempt to reposition it.  At acquisition, the building was largely occupied by those two tenants, whose leases were well below market and would roll over the next several years.  One of those tenants was a highly desirable, fast growing company whose original use was largely for product research and development.  While the tenant desired to retain the R&D use, it also wanted to reposition the remainder of its space into a high visibility sales office.  The other tenant was a light industrial company, whose use was incompatible with CCGL’s vision for the property.  The building is located in an area of rapid transformation and growth, with a new Metro North railroad station and a major mixed-use development planned adjacent to the site and a high-priced condominium project already successfully developed.  These projects were expected to substantially increase the desirability of the location and achievable rents.  A complete renovation of the common areas and a creative leasing strategy were required to capture the building’s substantial upside potential.

.Acquisition
The property was acquired, along with 1375 Kings Highway East, in June 2004.  CCGL bought the property from its original developer, who was approaching retirement and was unwilling to invest the capital required to reposition the asset.  He also lacked a vision for the future of the property.

.Results
By committing to a significant common area renovation and providing an allowance for the tenant to improve its space, CCGL renewed the building’s largest tenant for 10 years at significantly increased rents, two years prior to expiration of the existing lease.  CCGL then negotiated an early termination of the inappropriate tenant’s lease, without payment for the below market stub period or renewal option.  CCGL completed a total renovation to reposition the building to Class A office space and leased the vacancy to two large, quality tenants.  Within two and half years after acquisition, the building was successfully repositioned and fully leased.

Approximately three years after acquisition, 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, as an initial acquisition along with 1375 Kings Highway East, 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.