Boulogne Case Study

Location

• 35-37 Rue des Abondances, Boulogne, France
• Boulogne-Billancourt is located south-west of Paris in the Hauts-de-Seine department between Paris and the River Seine.
• Boulogne has 109,400 inhabitants and is the second largest town in the Paris agglomeration.
• Boulogne is an established office location with a strong image for iT and marketing companies, such as TF1, TBWA, Young & Rubicam.
• The Paris ring road is 2km east of the property.

Key Statistics

Asset Overview Progress

• The property is located in a high quality residential area providing privacy to tenants.
• The property consists of two buildings dating from the 1960s and a older small gate house, with 83 external car park spaces. The front building (building A) comprises 1,938m² of office accommodations; the rear building (building B) comprises 2,653m² of light industrial space; and the gate house (99m²) used to be for residential use.
• The main tenant Japan Tobacco international (JTi) used to occupy the whole building A and 63% of building B, i.e. 77% of the total property.

Key Management Issues

• JTi was the second largest tenant within the Fund which owned the property, representing 6.5% of the Fund’s total passing rent. However, JTi were 45% over-rented as at 30th September 2010. Moreover, 53% of their premises in building B had been either sublet (453 m²) or were not occupied (428 m²).
• Anticipating their lease expiry term in June 2011, JTi mandated an agent to study all alternative occupancy options. Rynda were confident that the tenant would want to remain on site and after assessing alternative options, the tenant entered negotiations with Rynda for a potential lease re-gearing to remain on site.
• At the time of negotiation, JTi’s premises were in satisfactory condition, but would need significant refurbishment works if JTi were to leave and the premises had to be brought to a marketable standard.
• The air-conditioning system used R22 refrigerant gas, which must be replaced as from 2012 to comply with health regulations.
• Building C was classified as residential use and had been entirely let to an architect on a professional lease, allowing the tenant to exercise their break option at anytime with a 6-month notice. The residential classification meant that a commercial lease could not be signed.

Progress

• After several months of negotiations with JTi, two new leases were signed with JTi, starting on 1st November 2010. The first one, on 2,647m², is a 9 year and 8 month lease, with a firm period of 6 years and 8 months, at a rent of €762,000 (€288/m²), compared to a market rent €254/ m². The second one, on 249 m², is a 3/6/9 year lease at a rent of €62,000 (€249/m²), equal to the ERV of €249/m². No rent free period was granted.
• As part of the lease agreement, the Fund committed to capex works, including the air-conditioning replacement in buildings A and B, and refurbishment of JTi’s premises. The estimated cost is €467,000 for 2011 and €500,000 for 2012. These are capex works which would have had to be done if JTi had left and the premises were refurbished to a marketable standard.
• JTi has paid the Fund €150,000 to refurbish vacated premises, and will also finance facade cleaning, replacement of external blinds, refurbishment of lifts, disabled access conformity works.
• Negotiatation are on-going to let half of the vacated premises (712 m²) to Vitalliance, former sub-tenant of JTi.
• For building C, Rynda was granted approval from the local authority to change the use from housing to offices and to sign a new 3/6/9 year lease with iMCOR on the whole building (99 m²) at the ERV.
• Globally, this package of lease re-structuring and capex has allowed the fund to maintain a high occupancy rate and to secure rental income. The valuation rose by 6% despite a fall of 30% in the passing rent due to the greater term security of income.