Challenging Situations Call for Savvy Strategies to Put Properties Back to Work.
Commercial real estate poses myriad challenges for brokers, developers, leasing agents, and property managers who must contend with market fluctuations, supply-and-demand factors, and intense competition to close deals. Consider, however, what happens when those challenges move beyond the norm.
Reinventing a particular property to make a deal work requires skills that transcend traditional brokerage, negotiation, and leasing strategies. In today's market, successful real estate professionals rely on technology, the ability to make quick decisions, creative financing techniques, and old-fashioned business savvy to complete most challenging deals.
The following case studies reveal the strategies used to bring a financially troubled industrial building, a dormant department store, and a vacant parcel back into productive uses.
Cosmetics Company Makeover
Finding a buyer and negotiating the sale of an industrial plant embroiled in red ink is a tough task under any circumstances. Doing it in a 30-day time frame while following strict zoning restrictions — and amid picketing by laid-off factory workers — raises the bar even higher.
That scenario unfolded in spring 1999 for Marc A. Boorstein, CCIM, a principal at MJ Partners Real Estate Services in Chicago. The property was the Erickson Cosmetics Co. building in a rapidly gentrifying corridor on Chicago's North Side. Erickson, a contract manufacturer of private-label cosmetics, ran out of credit and closed its manufacturing plant, allegedly canceling health-care benefits for 400 employees and neglecting to pay them a week's salary.
Amid a public relations nightmare, U.S. Bancorp of Minneapolis, Erickson's chief creditor, demanded that the property be sold quickly.
“The bank certainly was in a tough situation with the negative publicity it faced and the uncertainty regarding the best and highest use for the property,” Boorstein says. “Usually, a sale of this type would require six months to a year to complete. We had to bring a deal together with the close of the second quarter of 1999 [in] 30 days.”
The property, a four-story, 137,000-square-foot, loft-style building and a 16,681-sf surface parking lot, was located in a buffer zone of a planned manufacturing district. Thus, the property was restricted to quasi-industrial use with the possibility of a minor retail component to preserve jobs and maintain the tax base.
The short time frame added to an already problematic situation. Because of zoning, converting the space to residential lofts was not allowed. Demolition was considered but would not have fulfilled U.S. Bancorp's directive of a quick sale and return to profitability. Further, two powerful community groups threatened legal action if they didn't have a role in the approval process of redevelopment plans.
A marketing campaign targeted at national and specialty retailers quickly generated 10 offers from prospective purchasers. None could be accepted, however, because of the zoning restrictions and a potential clash with the community groups, which would lobby against a retail-only use. “If we could have marketed the property in a conventional way, we would have been able to explore a variety of different uses for the site,” Boorstein says. “With the existing zoning and the bank's desire for a quick sale, our options were limited.”
Boorstein tapped into a niche he is experienced with for an option that made sense: conversion to a self-storage warehouse with a small retail component. He knew the area needed an upscale self-storage facility, and this property use also would fit the area's zoning requirements.
Boorstein contacted representatives from Lock Up Storage Centers, a Northfield, Ill.-based company known for developing high-end self-storage properties in affluent Chicago suburbs. He knew that the company wanted to enter the Chicago market. Realizing the location's potential, the company bid the list price of $5.8 million.
“Before the offer would be accepted by the bank, we put together a market-analysis plan which outlined the potential performance of a state-of-the-art self-storage facility given the Erickson property location and the demographics of the community,” Boorstein says. “Our analysis projected that the demand for this type of service would increase substantially. We then set up a financing relationship between Lock Up Storage and U.S. Bancorp, which agreed to the deal and gave the company a loan to renovate the building.”
High-end self-storage facilities provide heightened security features, carpeting, climate control, and other amenities not found in conventional self-storage warehouses, Boorstein says. To renovate the Erickson property accordingly, a multimillion dollar renovation was launched in summer 1999, and completion was scheduled for this summer. The build-out included installation of motion sensors and security cameras, heavy load elevators, management offices, and a state-of-the-art heating, ventilation, and air conditioning system. The building contains about 1,100 10-by-10 lockers, renting at $240 per unit per month. Lock Up had a waiting list for the space before it opened.
In April, Thomasville Home Furnishings by Zierks signed a 10-year lease for 16,342-sf of ground-floor retail space.
A Landmark Renovation
Clad in detailed terra cotta, the 14-story former Gimbels Department Store is a commanding presence in downtown Pittsburgh. Only now, the 86-year-old building, rechristened Gimbels Landmark, will house a growing number of office workers rather than just shoppers — the result of an extensive renovation combined with a technology-driven marketing program.
Once an anchor in the city's downtown retail district, Gimbels — like many downtown department stores — fell on hard times and closed in 1986. Attempts in the early 1990s to return the 790,000-sf property to a productive use were marginally successful. Big-name retailers such as Barnes & Noble and Eckerd drugstore leased the lower floors, but that left more than 400,000 sf of vacant space spread over nine floors. Still, the property had tremendous potential due to its location, landmark status on the National Register of Historic Places, and huge 45,000-sf floor plates.
Enter a new group of investors led by brothers Bill and James Rudolph, local entrepreneurs who raised $25 million to purchase the building and renovate the upper floors into office space. Oxford Realty Services/Oncor International was hired to market the property to the Pittsburgh business community.
“The design and construction challenges we faced at Gimbels Landmark were similar to what you would find in most commercial property redevelopments, only magnified because of the scale of the project,” says Jeremy Z. Kronman, CCIM, the lead Oxford broker. “We also faced a big challenge of how to demonstrate to prospective tenants what the space would look like once it was finished.”
Constructed of steel framing and concrete, the Gimbels building was structurally sound, but required significant interior renovation and upgrades. New elevators with digital controls, restrooms compliant with the Americans with Disabilities Act, double-paned windows, and an HVAC system that meets modern air-quality standards were among the most significant interior upgrades made on a floor-by-floor basis. Also, the building lobby for office tenants was enlarged to provide access to the upper floors and recast with polished limestone walls and a terrazzo floor.
These renovations provided the physical improvements that class A office tenants demand, however, they did not solve another concern of the development and marketing team: how to bring natural light to the center of a building with floors large enough to conceivably house 200 to 300 workers per floor. The answer, provided by the Pittsburgh architectural firm of Burt Hill Kosar Rittelmann Associates, came in the form of a dramatic seven-story glass atrium capped by a glass dome.
Marketing this now-desirable building proved the second big challenge because Oxford had to change people's perception of it from retail to office. Also, the floor plates were large, making the space appropriate for companies seeking a large amount of contiguous space.
Kronman says the team got the full support of the investors. “One of the biggest and best assets we had were the owners,” he says. “They not only were willing to try something new, but they were willing to react quickly if the need arose. For example, a prospective tenant had trouble visualizing how much space was available on a floor. With the owners' approval, we went in and demolished the existing walls to open up the space.”
This type of forward thinking held true for the overall marketing strategy. Rather than rely on tried-and-true direct- mail and print campaigns, Kronman says the Gimbels Landmark team took a fresh approach. “We did not produce a traditional print brochure for the project,” he says. “We decided to produce a CD-ROM and offer a virtual reality tour on our Web site. [See this month's Tech Links column.] The owners understood that to really make this project work, we had to step out of the traditional marketing box and get creative.”
The marketing team decided on the CD-ROM because it wanted to convey that Gimbels Landmark was renovated into a building with the latest high-tech features, including fiber optics, high-speed elevators, and double the standard electrical capacity. In addition, it was more cost-effective to distribute the CD-ROM than a print brochure and cheaper to update. The overall marketing program cost $100,000 with $50,000 of that being spent on the CD-ROM.
So far, creativity has paid off. Last fall, Kronman's company negotiated a 60,000-sf lease with United Healthcare Services. The deal, which includes a 50 percent expansion option, ranked as the fifth largest office deal in Pittsburgh in 1999. The building, scheduled to open in September, is now 65 percent preleased with the Port Authority of Allegheny County committed to 70,000 sf.
Putting the Dazzle Back Downtown
Crystal Lake, Ill., once was a quiet small town where change and growth came slowly. That's not the case today. The community northwest of Chicago is one of the fastest growing in the state, boasting a population increase of more than 12,000 in just five years, a new commuter rail station, and low vacancies in both the residential and commercial property markets.
With precious few parcels left to develop in this booming municipality, a long-neglected 6-acre site near the central business district should have been redeveloped quickly after routine give-and-take negotiations between town government and businesses willing to put the property back on the tax rolls. However, four years and many hours of often frustrating negotiations later, the site was under redevelopment by not one, but three different companies.
“It all happened very quickly in the end,” says Casey Voris, CCIM, sales and service broker of Coldwell Banker Excel in Crystal Lake. The means to that end, he says, was a study in “patience, cooperation, and diplomacy.”
The property, actually six 1-acre sites zoned for manufacturing, once housed a trucking company and later a lumberyard. Neglected for eight years, the site clearly had some barriers: an abandoned rail spur, vehicle access restrictions due to road weight load limits, flooding due to inadequate drainage, four dilapidated buildings, and potential environmental hazards from underground fuel tanks.
In addition, finding a single buyer for the property and clearing the city's restrictions over flood control and building encroachment created serious marketing and legal obstacles. “Since the site actually was six separate 1-acre parcels, I had proposed selling it off in pieces,” Voris says. “But that proposal was rejected because the lender would not allow partial release of the mortgage.”
Over a four-year period, Voris marketed the property to numerous individual buyer prospects, mainly manufacturing companies with 50 or fewer employees within a 50-mile radius of the property. He conducted a direct-mail program using SIC codes to reach prospects, but all turned down the offer due to the road restrictions or the city's demands to incorporate additional flood control measures into any redevelopment.
“The city would not let us sell to a trucking company because of the load limits on the street leading to the property, even though another manufacturing company operated semis on the same street,” Voris says. “Also, there was the storm sewer issue. Because of the growth in Crystal Lake, the city maintained that the sewers were at capacity and would require use of 2 acres for an on-site retention basin. We hired a consultant who conducted storm sewer research of the entire area and determined there was no problem with the drainage.”
Despite these setbacks, Voris persevered and in late 1999 had a breakthrough: He negotiated a deal in which three separate buyers — a manufacturer of hardwood flooring, an excavation company, and an automotive repair shop — would close simultaneously to satisfy the seller and his lender. The buyers also would agree to take the necessary measures to meet the city's flood and various building requirements. Separate brokers and legal counsel would represent each buyer.
The flood control issue — caused by runoff from the rail spur and the surrounding neighborhood — was satisfied when the city granted each purchaser the right to design and install individual retention basins. Voris negotiated with the city engineer on behalf of the three prospective owners for the individual basins. That left three other hurdles to overcome: a building encroachment, the abandoned rail spur, and old underground fuel tanks.
In separating the parcels, one of the old trucking terminal structures encroached by 20 feet onto an adjoining parcel. This prompted the city building and zoning department to rule that the property could not be redeveloped because a structure already occupied the site and the site was not big enough to support a second building. “In essence, the city [said] it was not a buildable site,” Voris says. “So, we had to work out a demolition agreement between the two buyers to remove the encroaching part of the building.”
Although the railroad tracks had been removed from the property years before, the buyers wanted assurance that the Union Pacific Railroad, operator of the spur, did not maintain an easement on the site. Furthermore, the title company involved would not insure the property. Union Pacific determined there was neither an agreement nor an easement, a finding that satisfied the buyers but not the title company. This stumbling block was resolved when the buyers agreed to an exception for the rail spur on the title commitment.
The final problem centered on underground fuel tanks removed in 1986 under guidelines approved by the U.S. Environmental Protection Agency. A bank that was prepared to offer a loan to one buyer requested a new environmental report — a process that would have delayed the sale. Instead, Voris located a new lender who accepted the original report. The lender was found through his involvement in the community as an officer with the local chamber of commerce.
Finally, after years of marketing efforts and innumerable negotiations with the municipality, buyers, and various outside agencies, Voris closed the three deals simultaneously in January.