Otay River refi carries a construction bet

What the debt fund is underwriting at Otay River Business Park is the 30 percent of Phase IV that has not leased yet. JLL Capital Markets arranged the $81.6 million financing for Otay River Business Park in Chula Vista on behalf of Sudberry Properties, placing a five-year, floating-rate loan with a debt fund that carries future funding for construction completion and leasing costs — a refinancing with a construction tranche inside it.

The park, addressed at 2925-2945 Main St. and 2775-2970 Faivre St., sits just east of Interstate 5 and spans 369,803 square feet of industrial, distribution and retail space built in phases between 2021 and 2026. Existing space is fully leased, while Phase IV, still under construction, adds a 66,000-square-foot industrial building plus parking and is 70 percent pre-leased to an investment-grade tenant. JLL's capital markets team was led by Aldon Cole and Bharat Madan, with Jenna Frakes.

Refinancing fully occupied space is an income-and-term underwriting; funding a building that is only 70 percent spoken for is a completion-and-cost underwriting. A lender putting both into one floating-rate facility is pricing the remaining 30 percent as leaseable space and handing the borrower five years of rate risk on top of the construction exposure.

Sudberry's Otay River financing, as this publication has covered, is fully leased product getting construction-completion money. The deal extends that pattern: forward-funded money does the job of a construction loan at a moment when the existing park is full and only one building remains. Lease the remaining 30 percent of Phase IV before delivery, and the fund has effectively financed a stabilized asset at a construction lender's spread. Miss it, and the forward-funded leasing money is already in place to cover the gap.