Four Brokers Meet the Challenges of These Noteworthy Transactions.
Some demanding commercial real estate deals take a year, some take two, and occasionally one takes a decade. Some transactions are undertaken with zest for their big-bucks potential; others may involve more complicated motivations, including not only personal but community pride. What they all have in common — and what the following situations demonstrate — is an often overwhelming combination of pieces that must be melded with patience, perseverance, skill, and even a little luck to bring them to a satisfactory conclusion.
Vision Saves a Factory Town
In the typical factory town of West Allis, Wis., Allis-Chalmers, a world-renowned manufacturer of heavy machinery and the city’s biggest employer by far, had been a part of the community since 1901. When it filed for bankruptcy in 1988, 12,000 people lost their jobs, and the city — in fact, the greater Milwaukee area — was devastated. One hundred acres, including a 26-acre tractor works site, a 340,000-square-foot office building, and 450,000 sf of industrial buildings, sat idle.
Enter Thomas Q. Rowe, CCIM, SIOR, vice president of James T. Barry Co. in Milwaukee. The Allis-Chalmers Reorganization Trust was charged with disposing of assets to pay off creditors and hired the Barry Co. as exclusive real estate agent for the property in August 1989.
"I told [trust officials], ‘You can sell this property at a distress sale right now, or if you’re willing to follow the strategy we recommend, we’ll lease it up for you, you’ll get a good income stream, and instead of getting X, you’ll get 20 times X.’"
Rowe, who admits he’s "probably one of the more optimistic guys you know," offered a strategy both simple and visionary: Convert the office/manufacturing complex to multitenant use, upgrade, lease, and sell to an investor. Between 1989 and 1994, he was able to renovate and lease 85 percent of the total space to 75 high-quality tenants and sold the property to Whitnall Summit for $8.5 million. A.C. Equipment Services, a spin-off of Allis-Chalmers that repairs electrical power generation and mining equipment, was one of the largest lessees. Siemens Energy, a manufacturer of gas and steam turbines, was another. The owner of A.C. Equipment Services sold to Siemens and formed Whitnall Summit as an investment company.
In October 1996, Rowe approached Whitnall Summit about listing the property for sale as a step toward diversifying its holdings. The eternal optimist said, "I will find you a buyer." This was easier said than done because, while the spaces had been renovated and updated for each tenant, the property was still an unconventional investment. The buildings were almost a century old. There remained pockets of asbestos and PCBs that virtually no buyer would touch, and some areas did not comply with the Americans with Disabilities Act. Further, the complex was hard-wired with its own $4 million telephone system, which had to be sold with the property. "Most banks said, ‘We’ll lend you money to buy real estate, but not this telecommunications system,’" Rowe says.
A specialized marketing program was called for, which had Rowe making "hundreds of contacts coast to coast and border to border." Over many months, only 54 qualified buyers were found and six came to Milwaukee for a property inspection and interview. Many negotiations stalled because of the unconventional attributes of the property and/or an inability to secure financing.
The only potential buyer to survive was BGK Equities of Santa Fe, N.M., a private real estate investment firm, and an initial offer was negotiated over six months, at an asking price of $14.5 million. By this time, occupancy was up to 89 percent, and Rowe continued to lease over the next 12 months up to 99 percent. Because the additional leasing increased net operating income, the Barry Co. eventually negotiated a selling price with BGK of $16.4 million — $1.9 million above the original asking price.
"I know the tenants, I know their children, I know their wives," Rowe says. "The tenants have been stable all along because we take care of them. The city fathers absolutely love us because property values have increased substantially. Parking lots are full, people are making money, spending money. We built a 25-acre shopping center in one corner. Workers go out on their lunch hour and go shopping; they buy lunch, shoes for the kids, groceries.
"It’s an adaptive reuse story that towns like Buffalo, [N.Y.], and Youngstown, [Ohio], would love to have."
Some deals are challenging simply because of the number of pieces involved. In the case of a recent deal that Christian J. Johannsen, CCIM, negotiated, the pieces were 10 shopping centers — most anchored by major grocery- or drug-store chains and held in a number of partnerships — a buyer who unsuccessfully wooed two real estate investment trusts, a major Wall Street firm, and lenders both in the United States and Germany.
Johannsen, managing director of Aztec Group in Miami, has specialized in retail for the past eight or nine years. He was approached in January 1998 by Florida Neighborhood Centers, an affiliate of America’s Capital Partners investment company, about putting together a shopping center package.
Johannsen knew of 10 shopping centers owned by various affiliates of M2 Realty of Miami. Comprising about one million sf, they were scattered around Florida: two in Tampa, two in Miami Lakes, two in Jacksonville, and one each in Boca Raton, Stuart, Jupiter, and Miami.
Johannsen arranged for a meeting of principals and all the signs looked good. The deal — the 10 shopping centers plus the operating company — was scheduled to close mid-summer. "That’s when problems started arising," he recalls. Florida Neighborhood Centers had planned to finance the acquisition with a REIT. One REIT approved the project and then backed out for reasons unknown to Johannsen. Two months later, another REIT became interested, "but after about 60 days, they bailed out," he says. "We were under agreement for dollars to go hard at certain times, so all the while, M2 had to keep getting contract extensions from its various partnerships."
Five of the properties were financed by German banks, and five by U.S. financial institutions; all were in separate partnerships with M2. The acquisition money was coming from a major Wall Street firm, which was having "some serious hiccups" in the stock market turmoil of last fall, he says. Despite the shock waves, the firm decided it could honor its verbal commitment — but could not close the transaction in its current fiscal year, which ended Nov. 30. At this time, the German loans also were due to be paid off or refinanced. "There was one particular day when we had to know [which option to pursue], because the seller’s American lawyer was in Germany and had to know whether to tell story A or story B," says Johannsen. As it happened, once the German banks were assured that the deal would close early in the Wall Street firm’s new fiscal year, it was possible to secure extensions on the loans.
This part of the deal closed on Dec. 4 for about $62 million and the German banks were paid off. The remaining $43 million took a little longer, due to intricacies of terminology and notification requirements involved in getting the five domestic loans assumed by the buyer.
"Everybody worked together — which is not often the case in the real estate industry," Johannsen says. "Even the attorneys worked well together." The seller continues to retain an interest in the properties and management and leasing remain the same. The buyer has an ongoing relationship with the Wall Street firm, which has been well recompensed in the venture. It’s gone so well that Johannsen and Florida Neighborhood Centers are hoping to acquire another $400 million worth of properties in the next four or five years, he says.
Flying Start to 21st Century
Robert A. Rosenberg, CCIM, of Sacramento handled American Airlines flights at the gate at LaGuardia Airport in his first job out of college. Something must have rubbed off, as he’s back in the flying business big time. The president of Investnet, Rosenberg formed Lynxs Sacramento CargoPort with three Texas investors to develop the new Emery Worldwide Sacramento regional intermodal (airplane to truck) cargo facility at the former Mather Air Force Base.
"Strategically placed airports are the infrastructure for the 21st century in our increasingly global marketplace," Rosenberg asserts, pointing out that the success of companies such as Emery Worldwide, Federal Express, and UPS has been key to the growth of the whole economy. "They try to provide more and more integrated services," he explains. "Your package is in their control from the time they pick it up until they deliver it, with all the services in between."
As of early 1999, what Emery has at Mather is a "very, very efficient facility for heavy freight," Rosenberg says. "It’s a 33,300-sf building with lots of ramps and freight handling areas, on four-and-a-half acres." Getting there was something else again.
Rosenberg became involved two-and-a-half years ago, when a CCIM in Texas used the CCIM Red Book to find someone in Sacramento to work on an air cargo project. Sacramento County had acquired Mather — closed in 1995 in the first round of military base closings — by lease from the government.
Rosenberg formed a local development team that combined legal, architectural, building, engineering, and environmental specialties, and Lynxs, of which he is chief operating officer, bid successfully on the Emery project. All was going smoothly in negotiations with the county until the U.S. Postal Service decided to run its priority mail service in head-to-head competition with the private carriers. Emery, which already had a fleet of planes carrying regular U.S. mail, "immediately" had to build 2.4 million sf of facilities up and down the East Coast to handle its new priority mail contract, Rosenberg says, which it did by early 1998.
Back in Sacramento, Lynxs then negotiated and signed a lease with the county for the ground and a build-to-suit lease with Emery. Once the county lease was ratified by the local government in May, Lynxs could secure construction and takeout financing from a variety of banks. Financing itself was not a problem, but a number of clauses had to be negotiated to make the deal acceptable to the county and the lenders, mainly because of environmental problems associated with former military bases.
Fortunately, the Emery site proved not to be contaminated after extensive soil testing. However, numerous provisions still had to be worked out among the Department of Defense, Sacramento County, Lynxs, and Emery. Each entity had its special financing needs, and the air cargo industry is relatively new, necessitating adjustments for any number of unique or unforeseen items from rentals to utilities.
Mather is starting to grow. The county has brought in some industries and the Federal Aviation Administration has a major operation there. Uncertainty remains, however, about the roles of Mather and Sacramento’s other airport across town, which carries passenger traffic. To facilitate the growth, Rosenberg recently led the formation of another group, Sacramento Air Cargo Business Association, to bring shippers and carriers together.
With the boom in the just-in-time shipping industry and congestion at many airports in northern California, Rosenberg sees a bright future in Sacramento as an air cargo hub — and he hopes to ensure that Mather is set to handle the West Coast’s special needs.
Small Deal, Big Challenges
It isn’t only the multimillion-dollar deals that cause broker headaches — and great satisfaction when complete. Richard D. Whitney, CCIM, of Beverly-Hanks & Associates in Asheville, N.C., closed a deal on a 1.75-acre heavy-industrial estate property early in 1998 after three years of ongoing challenges.
The situation hardly could have looked more dismal: The site had held a successful road-equipment renovation business, with solvents and lead-based paints involved. It also had two underground storage tanks, one of which was leaking. More than 100 tons of abandoned trucks, bulldozers, and steamrollers littered the property. One of the two abandoned 10,000-sf buildings had major roof problems that caused ceilings and light fixtures to fall. No money existed for renovation because the estate was in bankruptcy.
A regional lender was clearly upside-down on the property, and, at first, determined to come out whole. "The property was financed in the ’80s, prior to the 1986 tax reform and subsequent decline in commercial real estate values," Whitney explains. "At that time it was the user property of a successful businessman. The buildings were well maintained and soil pollution was not yet an issue. Now it was a vacant contaminated site in deplorable condition."
Nonetheless, the lender wanted to list the facility at the outdated value of $495,000. "There was debt of $375,000," Whitney says. "They hoped to pay brokers’ fees, closing costs, and clean-up, then come out whole."
However, Whitney couldn’t find a serious prospect at that price. "I took the assignment because I knew the property had to be sold," he says. "There was going to be a closing. In time the lender would have to accept the market conditions. There was a payday here, and it might as well be for me."
Over two years, the lender slowly lowered the price from $495,000 to $395,000, then to $295,000. "It finally sold at $215,000 to a user with a machine shop," says Whitney, noting that at this point, "it became a good value for what he needed." The buyer was identified by a residential broker in a nearby city who had sold a house to the machine-shop owner, who had outgrown his existing space. The property came through the multiple listing service.
While it was under contract, however, Asheville passed a Unified Development Ordinance, which caused the machine-shop use to become questionable. Furthermore, the buyer also wanted approval for sheet-metal product manufacturing. "The city said, ‘We’ll let him do what he’s doing, but not what he’s planning.’ That almost caused the closing to fall apart," Whitney says. "But the buyer slept on it for a day or two and called back and said, ‘I’ll close anyway.’"
Then, just before the scheduled closing, the appraiser determined the building with the roof leaks to be worthless — which brought the appraisal below the contract price. "We convinced him that renovating would cost less than replacing, so therefore there was value in it," Whitney says.
After funding clean-up, tank removals, and closing costs, the lender agreed to write the $375,000 loan down to $180,000, and the sale was funded through a Small Business Association loan.
So the story has an upbeat ending. "It involved a lot of tenacity and luck to close," Whitney concedes, "but it was a matter of pride."