Redevelopment

Everything Old Is New Again

Adaptive Reuse Gives Properties a Second Lease on Life.

Modern commercial real estate abounds with restrictive-development guidelines such as land-use policies and urban growth boundaries intended to protect farmland and open space while encouraging economic growth in inner cities. However, these policies limit the amount of new development in already overcrowded areas and potentially threaten to inflate rents and sales prices while the quality of buildings decreases.

To comply with these policies and still make a profit, developers are forced to find available space, oftentimes by razing old buildings. Yet using creative thinking, many developers instead are rehabilitating these properties and converting them to new uses. Adaptive reuse, as this process is called, saves properties from the wrecking ball and also helps prevent urban sprawl.

By participating in the renovation of older properties, commercial real estate professionals may find new development opportunities that others have overlooked. The following four case studies show how brokers teamed up with developers in a variety of situations to make adaptive reuse work for them.

Auto Mall to Mini Mall Half Moon Bay, Calif., nestled between the Santa Cruz Mountains and the Pacific Ocean about 30 miles north of San Francisco, is a quaint tourist destination attracting more than 3 million visitors each year due to events such as the annual Art and Pumpkin Festival and excellent golf and surfing venues. However, because of its geographic isolation, the town has changed little since its early days, and many historic properties dot its landscape.

One of the city's old properties, the Granelli & Cook Building on Main Street, was in a state of disrepair. Built in 1938 as an automobile dealership, the dilapidated 12,000-square-foot barrel-roof building housed an automobile repair shop, a tractor/diesel repair shop, and a blacksmith/ironwork shop.

In the early 1990s, property owner Ozzie Cardoni approached David R. Worden, CCIM, a broker at Windward Commercial Real Estate Services about the possibility of rehabilitating the property. Located in the heart of downtown Half Moon Bay, the building was well situated as a retail center, and Worden recommended converting the property to an upscale, enclosed mini mall. At the time, the town's Main Street was dotted with primarily service businesses such as a dry cleaner, auto parts store, and sporting goods stores, Worden says. A retail center would help draw more tourist activity to the downtown. However, Cardoni considered other options, including a recreational facility, a retail property housing one or two tenants, and continued use as an auto repair facility. Worden generated cash-flow projections for all of the choices.

In the end, the mini mall was chosen as the most feasible, lucrative option. The development was designed to accommodate up to 12 retail tenants around a large interior courtyard. For the most part the planning stage was smooth, although the project encountered some small setbacks. “We has some difficulty getting the parking variance we needed, even though we added to the overall parking stock in the downtown area,” Worden says. “As Half Moon Bay lies within the California Coastal Zone, we also needed a coastal development permit because of the 'intensification of use.' The [permit] added expense and about three months to the entitlement process.”

During the rehabilitation, Worden assembled the lease offering package and began marketing the space. “I pressed Ozzie to name it early to give the place an identity,” Worden says. “I felt we needed an upscale identity that was completely different from the dirty auto garage I had to show prospective tenants.” Worden suggested naming it La Piazza, Italian for the marketplace, and Cardoni agreed. Using the project plans, drawing, and pro forma, Worden leased the entire development before completion.

When La Piazza opened in 1993, lease rates in the center were “top of the market,” Worden says. “While there has been turnover, we have managed to keep it full most of the time.” Current tenants include a European bakery, an art gallery, a wine and cheese shop, and an antique store. Much of the success of the development is due to the interior courtyard, which is used by tenants for special events and promotions. “The merchants are encouraged to let their wares spill out of their front doors to create a village marketplace environment,” he says.

La Piazza's success spawned a renaissance of downtown Half Moon Bay into a popular tourist site. “We ... turned an eyesore into a thing of beauty,” Worden says. “New businesses have been incubated here and the business owners and the town have benefited.”

Loft Living in a Factory More than 100 years ago, Reverend L.L. Sams began selling church furniture in Waco, Texas. His sons joined the business in 1946 and expanded it to include manufacturing, and L.L. Sams & Sons soon became one of the largest exclusive manufacturers of church furniture in the world.

The company conducted its operations from the Church Furniture Factory near Baylor University. The 13-acre industrial site consisted of several buildings, the oldest of which were constructed in 1920 and 1922.

In the late 1990s, the company considered relocating to a more modern facility and conferred with Jon W. Spelman, CCIM, president of Jon W. Spelman Co., about the possibility of selling the Church Furniture Factory.

“As the listing agent for several large warehouses in Waco's downtown restaurant and commercial area, I met Tom Watson, a developer of loft apartments,” Spelman says. “Knowing the possible availability of the L.L. Sams facility, I showed it to him.”

Due to the facility's proximity to Baylor University, a plan to redevelop the property into loft apartments quickly materialized. “The market was ripe for class A lofts with Baylor's growing enrollment and aging housing supply,” Spelman explains.

The property went under contract between Watson and the L.L. Sams family in August 1997. Due to some minor soil issues and the presence of underground storage tanks, Watson asked the owners to put it in the voluntary environmental cleanup program run by the Texas Natural Resources Commission. “The state oversees the testing and work and reporting,” Watson explains, “and the owner and buyer get letters saying future owners are indemnified from further problems.”

During the environmental cleanup, Watson finalized other aspects of the project, and three years later, the sale closed and construction commenced. The plan called for the redevelopment of the three-story anchor building and five others totaling 165,584 sf into 126 class A loft apartments using federal historic tax credits.

The buildings were in fairly good condition, with lots of clear space and high ceilings, Watson says. Not much interior demolition was required, and the bulk of the project included bringing the exterior back to its original glory. Most of the original window space had been filled in with glass and cinder blocks; they were replaced with new windows replicating the originals. “We tried to get it back to as much of the 1920s stuff as we could,” Watson says.

The one- to four-bedroom units in the L.L. Sams Lofts complex will be available to rent in June. Each unit will retain the original brick masonry walls and contain industrial-style, brushed-aluminum light fixtures. They are not marketed as student housing, but due to the property's proximity to the university and student facilities, Watson expects most of the lofts to be rented by students.

“We were able to preserve the most attractive historical buildings while filling the need for class A student housing,” Spelman says.

Serving the Community Since 1931, Community Council of Kanawha County has been providing social services such as adult education classes, child development programs, and after-school programs to the residents of this western West Virginia county. In the early 1990s it initiated a project known as the Family Enrichment Center that would combine both public and private family and health services agencies under one roof.

After several years of fundraising, Community Council began looking for a home for the project. It conducted a feasibility study and considered many options, including empty lots and existing structures. During its search, Community Council was shown a former heavy-construction equipment dealership by Stanley C. Thomas, CCIM, of Realcorp in Charleston, W.Va. The property consisted of a 25,825-sf heavy-construction equipment showroom and office facility on a 2.7-acre lot owned by the West Virginia Tractor and Equipment Co.

Community Council decided to purchase the property “because it was solidly built, could be adapted to its new use, has enough acreage to develop ample parking, and choosing to renovate would conserve the precious resources contributed by private and government donations to the capital campaign,” explains Loretta Jett Haddad, executive director of the center. “The building happened to be located in the geographic center of Kanawha County, and therefore makes the location desirable for providing a multitude of services to families in one location.”

Cost was another consideration. “I originally listed the property for $1.3 million,” explains Thomas, who represented both parties in the transaction. “According to the design/construction team doing the initial due diligence on the project ... ‘even at this price, the overall project cost would total $4.22 million, a net savings of $240,000 compared to new construction.'”

The acquisition money was donated by Betty Schoenbaum in memory of her husband Alex, the founder of the Shoney's restaurant chain, who helped facilitate development of the center until his death in 1996. Total development costs exceeded $6 million, of which more than $4.2 million has been donated by foundations, businesses, and individuals.

Renovations began in January 2001. Since the property was a former industrial site, extensive environmental due diligence was performed, Thomas says. The state health department conducted studies and found minimal amounts of lead-based paint and asbestos in the roof and flashing, which were remediated. Underground storage tanks also were removed from the property.

By December 2001 most of the renovations were complete. Portions of the original blonde-brick exterior were incorporated into the new design to maintain some of the building's original character, Thomas says. Interior columns and the roof also were left intact.

“At Family Enrichment Center, we have designed an integrated facility to support a new integrated service strategy, using an existing structure,” Haddad says.

Tale of the White Elephant More than 20 years ago, Bruener's Home Furnishings Corp. converted a former aerojet facility in San Ramon, Calif., into its corporate headquarters. Although the facility fit its needs, the company ran into problems when it tried to sell it in the early 1990s.

“They had 22,000 sf of a one-story office building, which was attached to a 50,000-sf concrete tilt-up building that they converted to office space. The buildings were obsolete and were not suitable for use for a corporate headquarters, but the property included over 6 acres of land,” explains Martha Douglas, CCIM, broker associate at TRI Commercial/Oncor International in Oakland, Calif. “The property had been offered for sale before but was considered a white elephant. No one wanted it as a corporate office or knew what to do with it.”

Bruener's had been attempting to sell the property for more than a year when Douglas met the company's chief financial officer while serving on the San Ramon chamber of commerce. The CFO asked Douglas if she thought she could sell the property.

“I had a strong suspicion that the property would not be sold to someone for the current use as an office building, but I knew from being active in commercial real estate in the area that there was a demand for auto services with few places for this type of business to locate,” Douglas says. Bruener's management agreed and hired Douglas to get the project rolling.

Douglas drew up conceptual plans to help market the project, and after only four months, she found a developer who agreed the auto service and retail center was feasible. Douglas then asked city staff members to consider rezoning the property to allow for auto service and retail use. She arranged meetings with the prospective buyer, the mayor of San Ramon, and the planning director. The city consented to the rezoning, and Douglas drew up the purchase contract.

After about two years of redevelopment, the property changed radically from its former look. “One would never suspect this was once a corporate office,” Douglas says. “There is now a good-looking auto service center with a car wash on one corner and a Big O Time on the other end and an auto parts store in the middle.” Also, the 50,000-sf building currently is earmarked for conversion into a self-storage facility.

Recycle or Raze? In areas where available land is scarce, adaptive reuse offers a way to create new space without losing a community's history.

“There's a lot of value to maintaining our connection to the past,” Thomas says.

Due to the many low-interest financing programs available to renovate older properties, Thomas believes adaptive reuse offers a cost-effective development option. He recommends finding developers and architects who can incorporate as many historical aspects into the design as possible to maximize the financing options available.

Worden also believes that adaptive reuse offers property owners a cost-effective option for unused property, as well as other benefits. “As in the case of La Piazza, the benefits go far beyond providing income to the property owner,” he says. “This started a revitalization of the downtown, improving the look of the area, creating local jobs, and providing sales tax revenue to the city.”

Gretchen Barta

Gretchen Barta is associate editor of Commercial Investment Real Estate.

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