Financing a Vision at Watermark Tempe

Working against the odds, Fenix Development and George Smith Partners joined forces to assemble $150 million for the first phase of a high-end office and retail project just outside Phoenix. Here’s how.
Watermark Tempe
The first phase of Fenix Development’s Watermark Tempe is 44,000 square feet of retail, 265,000 square feet of office and a 360-unit apartment building being built by Trinsic Realty Group.

Despite appearances, the Watermark Tempe, Fenix Development’s $150 million mixed-use development in Tempe, Ariz., was not an easy project to fund. Construction at the lakeside development is well underway, several tenants have been signed for the 44,000 square feet of lifestyle retail space, and negotiations for most of the 265,000 square feet of Class A office space look promising. But speculative developments, particularly one in a historically volatile secondary market like Tempe, always require a leap of faith. 

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The developer hired George Smith Partners, the L.A.-based capital markets advisory firm, to complete its capital stack.

“If this project was in Los Angeles, it would have been a lot easier to finance,” noted Fenix Project Manager Mike Loretz. L.A.-based Fenix bought the site at 430 N. Scottsdale Road in Tempe Town Lake almost a decade ago.

“It was vacant for some time. We purchased it at a time when there wasn’t much of an office presence in Tempe and the only high-rise Class A office was across the lake from us,” Loretz noted.

It was soon after the housing market had collapsed, with the country still in recession.

“Back in the downturn, (Greater Phoenix) was one of the markets hit hardest, second only to Las Vegas,” he said. “Because of that, there was a stigma. We had to go through a lot of hoops.”

Riding the Phoenix wave

Fenix knew, however, that it had a unique piece of property in a market that was just minutes from Phoenix Sky Harbor International Airport and downtown Phoenix. But things really started to look promising when, in 2013, State Farm announced it was building a 2 million-square-foot regional headquarters at Tempe Town Lakes. Known as Marina Heights, State Farm’s new facility brought thousands of workers to the area.

“Phoenix has a history of going up and down maybe more than the rest of the country,” agreed Scott Meredith, senior vice president at George Smith Partners, who worked on the Fenix deal with Assistant Vice President Huber Bongolan. “But that has changed a lot in the last 10 to 15 years. Tempe is attracting a lot of tech companies, a lot of finance companies and a lot of insurance companies.”

Tempe has a sub-five percent office vacancy rate now and was recognized as the No. 1 market in the nation for office absorption and rising rental rates, according to CBRE’s annual Tech-30 report. Joining State Farm in the area are ADP, Uber, ZipRecruiter, Amazon, eBay and Microsoft.

Watermark Tempe
Fenix Development’s Watermark Tempe master plan also includes a 1.7-acre premium hotel pad that is fully entitled for up to 251 keys. The developer is looking to sell that pad to another developer.

Stacking up

Fenix was planning on providing at least some of the equity for The Watermark Tempe and had already sold off part of the property to a residential developer, Trinsic Realty Group, which is building 360 luxury apartments called Aura Watermark. While it hasn’t been sold yet, there is also a 1.7-acre premium hotel pad that is fully entitled for up to 251 keys.

When George Smith Partners entered the picture, Fenix already had an $80.5 million senior loan from Bank OZK, formerly known as the Bank of the Ozarks, in the works.

“However, the lender required a high preleasing threshold prior to funding,” Meredith said. “This limitation had proven insurmountable, as the local leasing market would not commit to signing new leases without a confirmed delivery date.”

Meredith called it a bit of a chicken and egg situation, noting that construction lenders like to see preleasing while potential tenants like to see “something coming out of the ground” before they commit.

In the end, Meredith said the parties worked out an agreement and the senior loan was secured. The three-year, interest-only loan comes at a rate that’s 4 percent over LIBOR.

Meredith added that the sponsor was also unsure if they wanted to seek a joint equity partner or preferred equity partner, so they went out to market for both.

“We went back and forth about what would be the best structure and ultimately decided given various variables the mezzanine was the best solution for him,” Meredith said.

He sourced multiple investors and was finding some of the same concerns about the market and the speculative nature of the project.

“The deal was challenging in that regard. We didn’t have unanimous support from the capital market. That’s OK, we never do, but we found several that were interested,” he said.

Watermark Tempe retail component
Obon Sushi + Bar + Raman,  Dip Nail Bar and V’s Barbershop have all committed to opening new shops at Watermark Tempe. Additional phases of the project will include another 20,000 square feet of “lifestyle”retail.

Meredith declined to name the lender or provide many details but said that he arranged a $25 million mezzanine construction loan that is coterminous with the three-year senior loan. Fenix is providing the remaining $45 million to fill out the capital stack for the project’s first phase.

Loretz said they expect to top out the 16-story office building in March and are on track for a September opening for the entire development. By early last December, Fenix had signed three tenants for the retail and restaurant space—Obon Sushi + Bar + Ramen, V’s Barbershop and Dip Nail Bar leased 7,000 square feet.

He added that Fenix was in negotiations with four potential tenants to take about 200,000 square feet of the office space.

The office tower will feature a ninth-story sky lobby with balcony, gardens and tenant amenities including a fitness center and spin cycle studio, bar/lounge, game room and conference center. The retail space will have dramatic ceiling heights, lakeside restaurant space, a rooftop terrace and be centered around a splash pad that will connect to a boardwalk and Tempe Town Lake.

“All the components—office, retail and the apartments—are very synergistic,” Loretz said. “We definitely have the nicest product coming online.”

Images courtesy of Fenix Development

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