$26,800,000 Industrial & Medical Office, Tustin, CA

Portfolio Financing Across Industrial and Medical Office Assets in Tustin, CA

Commercial Lending Solutions recently closed a $26,800,000 permanent loan secured by a mixed portfolio of industrial and medical office properties in Tustin, California. The deal required underwriting two structurally distinct asset classes under a single financing facility, negotiating allocated loan amounts at the individual asset level, and placing the loan with a lender whose credit culture could accommodate that complexity on a balance sheet basis. It was not a straightforward execution, and the path to close reflected how differently the capital markets treat these two property types even when they sit inside the same portfolio.

The Deal

The sponsor owned a portfolio of income-producing assets in Orange County's Tustin corridor, a market that has attracted sustained institutional interest as infill industrial vacancy has remained persistently tight and as medical office demand has held up along major suburban healthcare nodes. The borrower's objective was straightforward in concept: consolidate permanent financing across the portfolio under one facility, lock in a long-term fixed rate, and preserve flexibility to sell individual assets down the road without triggering a full loan payoff.

The target structure was a ten-year fixed-rate permanent loan with a thirty-year amortization schedule, sized to blended leverage in the 60 to 65 percent LTV range across the portfolio, and structured with negotiated release provisions so that a future disposition of one asset would not require retiring the entire loan balance.

The Challenge

The core difficulty was that industrial real estate and medical office real estate are underwritten by lenders through completely different lenses, and forcing them into a single blended loan amount without asset-level allocation creates problems that surface either at credit committee or at closing.

On the industrial side, value tracks triple-net in-place rents, tenant credit quality, and the supply-constrained fundamentals of Southern California infill. A lender underwriting stabilized industrial in Orange County at this point in the cycle is generally comfortable pushing leverage, because re-tenanting risk is low, build-out costs are minimal, and the tenant base tends to be operationally committed to their locations. The Tustin industrial assets carried an additional consideration: the former MCAS Tustin base sits nearby, and that history puts environmental due diligence squarely in play on any industrial asset in the immediate corridor. Phase I and potentially Phase II work was a non-negotiable part of the process before any lender would commit.

Medical office is a different underwriting conversation entirely. Lenders price in the covenant strength of physician-group tenants, who are often organized as small practices rather than large health system credits. They also price in the cost to re-tenant medical space, which is materially higher than general office because of specialized plumbing, electrical, and HVAC build-out, and because parking ratios required for medical use are stricter than standard office. Lease rollover in a medical office building is expensive, and lenders know it. A lender willing to go to 65 percent LTV on the industrial component would typically want to be at 55 to 60 percent on the medical office assets given those re-tenanting and rollover risk considerations.

A CMBS conduit was never realistic here. Conduit lenders want clean, homogenous collateral pools. A cross-collateralized, two-asset-class portfolio of this size with release provision requirements and environmental considerations on the industrial side would have been a difficult fit for the securitization model. The deal needed a lender that could hold balance sheet paper, think about the two asset classes on their own terms, and negotiate blanket debt structure across them.

The Solution

The deal was placed with a national life insurance company that maintains a dedicated commercial real estate debt portfolio and had existing comfort with both Orange County industrial and suburban medical office. The structure that emerged allocated the loan amount asset by asset rather than applying a single blended LTV across the pool. The industrial assets supported higher leverage given in-place NNN rent coverage and market fundamentals. The medical office assets were sized more conservatively, reflecting lender caution around physician-group tenant rollover and re-tenanting economics.

Environmental due diligence on the industrial side was coordinated in parallel with the credit process rather than sequentially, which kept the timeline intact. Release provisions were negotiated into the loan documents at execution, with release prices set at a meaningful premium to the allocated loan balance to protect the lender's remaining collateral coverage in a partial disposition scenario.

The Outcome

The borrower closed a $26,800,000 permanent fixed-rate loan, ten-year term, thirty-year amortization, at blended leverage consistent with the 60 to 65 percent range across the portfolio. The sponsor exited the transaction with long-term rate certainty on the full portfolio, a clean permanent capital structure, and documented flexibility to execute a future single-asset sale without a full loan unwind. The complexity of the deal was solved at the structuring stage, before a lender was ever approached, which is where that work belongs.