State of CA Air Resources Board Complex 5 Properties Offered at $20,251,328 CAD in Sacramento, CA

CBRE is pleased to offer a beautifully maintained ±55,998 net usable square foot laboratory complex long-term leased to the State of California. The sole tenant is the California Air Resources Board-Monitoring and Laboratory Division (CARB), a mission-critical agency that oversees and coordinates California’s efforts to test, measure and limit its residents’ exposure to air polluting elements of all kinds. The Subject is strategically located mere blocks from CARB’s headquarters at 1001 I Street in Sacramento as well as California’s State Capitol, the seat of government for the most populous state in the Union and the world’s fifth largest economy. The Complex is within walking distance of the State Capitol, dozens of other State of California buildings as well as dense residential and retail offerings of all kinds. The Central Business District location is simply superb and not susceptible of easy replication.
Since initially taking occupancy of 1927 13th Street in 1981 and 1900 14th Street in approximately 1998 the Agency has requested and received periodic improvements and upgrades to its buildings so as to maintain top-of-the-line state-of-the-art facilities. In the last 12 years Owner reports lab upgrades of approximately $4 million. The CARB’s satisfaction with the facilities is patent. They have been in place for approximately 34 years and executed a 12-year lease extension in 2021.
The Opportunity is priced at $14,515,000. The offering price equates to $259 per square foot with a going in capitalization rate on current annualized net operating income of 8.0%. Our 10-year discounted cash flow analysis (Argus™) that assumes Tenant renews its lease in 2034 and a sale of the Complex after 10 years projects an unleveraged annual IRR of 9.99% and a leveraged return of 14.54%. The Tenant’s most recent extension of term commenced on November 1, 2022 and extends to November 30, 2034. The State, as is the case with almost all State leases, possesses a termination right effective on or after October 31, 2029. Rent increases annually by approximately 1.5%.The lease is modified gross with Tenant responsible for gas and electric costs. As well the Tenant reimburses for requested mechanical system repairs, upgrades and replacements plus an administrative override of between five and fifteen percent for said work. On an annual basis this additional revenue has approximated $25,000 to $50,000 per year for the last 14 years. Please note that pricing herein does not include this revenue suggesting value enhancement above and beyond the annual rental increases baked into the Tenant’s lease.
The Complex is ideally situated in Sacramento’s Central Business District with immediate access to all area freeways, abundant dining and entertainment options and dense, varied residential options. Regional Transit public transportation is available via the 13th Street light rail station which is two blocks away from the Subject at R Street and the 13th Street bus line is three blocks away at Q Street. Ready access to public transportation is exceedingly important to the State of California as it wishes to make commutes as straight-forward and affordable for its employees and customers as possible. We should add that Regional Transit’s fleet of electric light rail and buses fueled by natural gas are especially attractive in this regard.
This is the first time the CARB buildings have been offered for sale in 34 years. The Offering represents a rare and very attractive opportunity to acquire assets with an investment-grade tenant, the State of California, which has clearly evinced a long-term commitment to this location and these facilities. As a result of substantial building improvements paid for by the Tenant over a number of years and the Owner’s granular attention to detail in its management and operation of the Complex, non-routine expenditures are expected to be minimal for the foreseeable future. Too, as the State continues with its requests for modifications and upgrades to the physical plant and its improvements the administrative override fees that Owner charges, which have not been included in our underwriting herein, may prove to be a substantial source of additional revenue for Buyer well into the future.
The critical functions performed by CARB and its significant investment in this location and these buildings suggest that the probability of serial renewals and long-term occupancy is high.