Developing a New Approach
As the commercial investment real estate business becomes increasingly complex, more brokers are finding a niche and staying with it, using past experience to their advantage. Although one deal is never exactly the same as another, each transaction builds on the previous one, so a broker who has done several retail deals is inherently more knowledgeable about all aspects of retail, including the market, site selection, pitfalls, and franchise preferences.
The challenge is to keep the niche interesting, while finding a way to use that experience to one's advantage. Robert A. Zache, CCIM, president of Central Place Real Estate in Madison, Wis., has met that challenge and created a new area of business for himself.
Zache's expertise in hospitality has led to a service-based approach that he calls development management. He is paid a fee to develop another person's property for them, he says. “I basically act as a corporate real estate department, providing all elements of control and coordination over the real estate phase of the development process for a client.”
Although taking on someone else's development headaches is not everyone's idea of the perfect job, it is a way for seasoned professionals to use their expertise and passion for development without having to assume the financial risks.
Zache's recent experience coordinating the development of a tract of land outside of Chicago illustrates both the problems and possibilities inherent in this type of work. “It takes more than just brokerage services to put together the deal and get it developed to the point of closing for the end users, as well as the sellers,” he says. “Without our development management approach, this [deal] might not have come together.”
At the same time, as an independent service provider Zache had the opportunity to take on a larger role in the development process -- which might not have been available to him if he had been affiliated with one of the involved parties.
A High-Profile Site
The site was “a landmark piece of real estate for the north side of Chicagoland,” Zache says. “It was the only remaining -- and largest -- single piece of land on the Edens Expressway between the CBD and the North Shore area.”
It wasn't the first time Zache had attempted to put the site under contract for his client, hotel developer Raymond Management Co. of Madison. “We identified this site originally in 1990 but couldn't make the numbers work and couldn't get past the environmental conditions at the time,” he says.
Located in Skokie, Ill., across from Old Orchard Center, a revitalized regional mall, the site once had been occupied by a print shop. Chemicals stored there had leaked, contaminating the soil.
“Until the environmental laws were modified to allow a reasonable cleanup strategy, the site just sat there,” Zache says. Finally, “In 1994 or 1995, Joseph Freed and Associates, a major Chicago developer, put the site under contract and worked with the seller, State Farm Insurance, to remediate it.” That included digging up and stockpiling the soil to dry it out and installing a clay pan under the site to prevent further ground-water contamination. “One of our primary conditions of purchase … was to have a closure letter from the Department of Natural Resources, which we subsequently received,” he says.
Despite the delays, Zache stuck with the site for several reasons. “Wisconsin is RMC's home base and it owns or is a partner in approximately 30 hotels located across the Midwest,” he says. “Chicago was a logical market extension.”
“Additionally we worked with Promus Hotels [Hampton's parent company, recently acquired by Hilton Hotels Corp.] to try to penetrate their more difficult markets on a regional basis and Skokie was one of them,” he says. “These difficult markets are high demand but are already built-up: Sites are not available, land is prohibitively expensive, and barriers to entry are high. The Skokie market was underserved by hotels, but there were very few acceptable opportunities to get a new hotel located in the area.”
Once the site was remediated, Zache approached the complex task of development management for his client –- “the coordination, administration, and completion of all work required to close the contract up to the point of physical construction of the asset. This includes control of all engineering, soils, survey, and environmental consultants; as well as architectural, legal, and municipal-approval responsibilities.”
Competing interests for use of the site made Zache's skills immediately useful. “Freed had a contract on the total 6.5-acre site, of which RMC wanted 3 to 4 acres for an eight-story, 225-room Hampton Inn & Suites Hotel with an interior national restaurant,” he says. “Ultimately we were retained to be the development manager on the entire site, both to master plan and get approvals for the entire 6.5-acre master parcel, including the 4 acres for the RMC hotel development.”
Complicating Zache's task was competition from a national real estate investment trust. Originally, the other half of the site was to be sold to the REIT for its own hotel development.
“When the REIT found out we were a significant competitor, they renegotiated the deal with the seller, substantially increased the purchase price, and went under contract for the whole site … cutting us out of the deal,” Zache says.
However during the approval process, the REIT had financial problems. The seller reapproached RMC to take over as the lead project with the REIT in a secondary role.
“We designed the master plan with the REIT as part of the development and began to go through due diligence and the approval process. The REIT, subsequently experiencing further financial complications, pulled out of the deal for a second time and permanently abandoned the site,” he says.
This complicated the approval process, which already was complex because of the site's density. Freed ended up selling the second part of the site to Extended StayAmerica. But at the time of the approvals, Zache had to design and get approval of a master-planned site for two hotels and a restaurant with only one of the occupants finalized. “We were required to get specific implementation plan approvals on the master plan for only the Hampton Inn project, with a general development plan approval for the future unnamed restaurant and future unnamed hotel,” he says.
In addition, the restaurant was to be built within the RMC hotel facility. “We had to get a variance from Promus Hotels to allow a restaurant inside of the Hampton Inn & Suites, something not usually allowed,” he says.
Zache estimates the total project value for the hotels and restaurant to be greater than $30 million.
The complexity of his role in the transaction added to its significance. He found that the CCIM designation “gave [me] a lot of credibility and removed a lot of barriers to being selected to represent both sides of the deal for mutual benefit.”
Zache's development-management approach grew out of his previous experience as RMC vice president where he handled similar responsibilities. But he finds that his current service-provider role “allows me more freedom and gives me the ability to do my own independent real estate deals and developments that I could not do while in a corporate position. It also brings me more deals and more strategic clients that would not have come my way if I were in the corporate employee position.”
And it works in his favor when dealing with other parties. “It removes those subliminal barriers to other compatible users, such as restaurants, that are more willing to work with me in specific markets as a broker,” he says.
After 18 years in the hospitality industry, Zache has found a niche that maximizes use of his talents and experience. He cautions though, that “development management is not for the inexperienced. The risk and liability given to a development manager are high, as are the stakes and costs involved. Only a seasoned veteran used to doing many projects of a specific type of deal should take on the responsibility to do someone else's development. It is more than just brokerage work.”