Overview
A 325,557 RSF Class A office complex at 9651 and 9655 Katy Freeway, Houston (City of Hedwig Village, Memorial City/Katy Freeway corridor), built 2019 and comprising two six-story towers (Village Tower I, 141,249 RSF; Village Tower II, 141,059 RSF), a single-story plaza (43,249 RSF), and a six-story parking structure. The asset is held under a non-triple-net master lease to affiliate Moody Village Towers MT, LLC, with base rent supplemented by percentage rent equal to 70% of gross revenue over an escalating baseline. The income profile delivered to Holders was materially restructured after issuance: the Fourth Supplement (August 31, 2023) introduced an unsecured sponsor Note issued to every Holder, including those admitted before the supplement, which raised the anticipated all-in annual return above the base PPM proforma on a front-loaded basis that decays to the base rate by Year 10 as the Note matures November 30, 2031. The offering also converted from Rule 506(b) to Rule 506(c) general solicitation, accredited-investor-only (Second Supplement), and its termination horizon was extended in stages to a 45-month anniversary of the Conversion Notice (Eleventh Supplement). The tenant base skews toward energy and financial credit (Prologis, EnCap Investments, SEP Permian, Solaris Oilfield, Solaris Midstream, Veritex Community Bank, Frost Bank, WSP USA); as of October 2025 the Project was 99.64% leased, with 2ND.MD vacating 26,507 SF on December 31, 2025 and Tauber Oil backfilling 16,083 SF at roughly $3.90/SF above the prior tenant's final-year rent. The operating thesis is income-in-place with a single-asset, roughly 10-year hold and a contemplated disposition around the 2032 loan maturity.
Highlights
Going-in leverage is conservative relative to the broader DST office cohort: $74,500,000 of debt against $210,750,000 of total capitalization yields a 35.35% loan-to-cost, and even measured against the lower of two independent as-is appraisals ($184,300,000) the loan-to-value sits near 40%, preserving substantial equity cushion ahead of a disposition into a stressed office market.
The full $74,500,000 floating-rate facility (Term SOFR plus 185 bps) is hedged to a synthetic fixed coupon of 5.09% for a tenor co-terminous with the 10-year hold, neutralizing reset risk across the entire ownership period and insulating distributable cash flow from rate volatility in a higher-for-longer environment.
Investor income was enhanced post-closing by the Fourth Supplement's unsecured sponsor Note, lifting the anticipated all-in annual return from the base 4.50%–5.88% DST distribution band to 4.88%–6.00%, with the uplift concentrated in Years 2 and 3; because the Note carries a fixed 5.12% coupon and fixed per-Interest principal, the enhancement is dollar-defined rather than performance-linked and reverts to the base distribution in the final year as the Note matures, distinguishing it from genuine property-level income growth.
Income is structurally bifurcated between contractual base rent (roughly $7.32M annually, essentially flat) and percentage rent set at 70% of gross revenue above an escalating baseline, channeling revenue outperformance directly to Holders; projected percentage rent grows from $2.73M in Year 1 to $4.61M in Year 10, supplying the base-case ramp in property-level cash-on-cash from 4.50% to 5.88%.
The 2019 vintage and a stabilized 99.64% leased rent roll anchored by credit names (Prologis, Frost Bank, Veritex, EnCap, WSP USA) reduce near-term capital intensity and single-tenant concentration relative to suburban-office norms; recent leasing momentum is positive, with Tauber Oil's January 2026 backfill of vacated 2ND.MD space struck at roughly $3.90/SF above the departing tenant's final-year rate.
Analysis
Insights
The risk-adjusted profile is that of a modestly levered, stabilized Class A Houston office asset underwritten for income, deployed into a secularly challenged sector during a high-rate cycle, with a sponsor-engineered income overlay layered atop softening property-level performance. The financing structure—35–40% leverage termed-out at a synthetic-fixed 5.09%—is genuinely de-risking versus peers facing near-term maturities. The principal fragilities are in the assumptions and the income architecture rather than the capital stack: FY2024 actuals below proforma, an income enhancement dependent on the unsecured creditworthiness of the sponsor rather than the real estate, and a Year-10 exit that must clear a basis already above independent appraisal. The serial termination extensions and deepening 15%–20% new-purchaser discounts indicate weak placement velocity ($56.3M of $136.25M sold by December 2025) and imply that recent entrants transact at a more favorable effective yield than original Holders. Feasibility of the marketed all-in return is supported in the early years by the front-loaded Note but is not corroborated by property cash flow, and the convergence of loan maturity, Note maturity, and planned disposition concentrates outcome risk at the most uncertain point in the office cycle.
Advantages
The offering pairs a recently constructed, stabilized Class A asset with conservative 35–40% leverage and debt synthetically fixed at 5.09% for the entire term, removing the rate-reset exposure currently impairing peer office vehicles. Tenant credit quality exceeds the suburban-office norm, aggregate occupancy is effectively full, recent re-leasing has been accretive on a rate basis, and the percentage-rent mechanism affords participation in revenue growth. The post-closing sponsor-Note overlay raises near-term distributable cash to Holders above the base proforma, and new purchasers after December 2025 receive a 15%–20% price discount that further lifts effective cash-on-cash on invested capital. Macro positioning benefits from Houston MSA growth and an established Katy Freeway/Energy Corridor node, while two independent appraisals broadly corroborate acquisition-level valuation and the modest debt quantum limits property-level loss-given-default.
Concerns
The master lease is expressly not triple-net, leaving the Trust exposed to expense inflation—real estate taxes alone are underwritten to climb from $2.15M to $2.80M over the hold—compressing net cash flow if reimbursements lag, and FY2024 unaudited combined property NOI of roughly $8.16M ran well below the comparable proforma year, indicating the base trajectory is not being met at the property level. Master-tenant capitalization is a structural weakness: projected Master Tenant Proceeds are negative in Year 1 (-$492,589), concentrating performance risk in a thinly capitalized related party. The post-closing income uplift is funded by an unsecured general obligation of the sponsor with no security and no trustee; a portion of each payment is return of Note principal rather than yield, the interest component is taxable ordinary income, and the Note allocation constitutes taxable boot for 1031 purchasers, diluting after-tax and tax-deferral efficiency. Tenancy carries energy-sector cyclicality and active rollover, evidenced by 2ND.MD's negotiated reduction and December 2025 vacatur of 26,507 SF. The recourse loan balloons at the same horizon as the planned sale, creating refinance-or-sell convergence risk, and the asset was acquired from a sponsor affiliate at a basis ($210,750,000 total cost; $199,901,945 assumed Project value) exceeding both as-is appraisals (~$184M). The repeated extensions of the offering-termination date to 45 months and the escalating purchase discounts signal a protracted, undersubscribed capital raise.
