Expect the Unexpected

Adaptive Reuse Can Turn Banks into Car Washes and Fast-Food Restaurants into Dentists' Offices.

Life doesn't always go as planned. That's especially true for commercial real estate professionals who find themselves struggling to revitalize weary structures or locate the right property when all roads seem to hit dead ends. Often in such cases, it's a use or property that didn't initially come to mind that can spur a plan of attack.

"There may be hidden values in doing some creative thinking about it," says Joe Milkes, CCIM, MAI, of Dallas-based Milkes & Associates. "You have to be not so concerned with what the intended function was, but look at the features of the property." What he's talking about, of course, is adaptive reuse, which can reinvigorate underutilized properties.

For instance, adaptive reuse is helping to rehabilitate many urban centers, repositioning old office and industrial buildings into new residential housing, and former military bases and nuclear facilities are being reborn as industrial parks. Some changes are more unexpected, such as a Chicago company's development of a vacant church into residential lofts or a former Texas day-care center that now is an adult bookstore.

Adaptive reuse requires significant planning and guesswork and can be risky—outcomes and costs don't always turn out as planned despite efforts to anticipate them. The following projects give a sampling of some recent innovative adaptive reuse ideas, highlighting the successes and problems that arose along the way. They also serve as a reminder that new ideas always are out there-and the solution to a property dilemma may have been just down the street all along.

Father Knows Best: From Bank into Car Wash
The successful outcome of the most interesting adaptive reuse project that Joseph W. DeCarlo, CCIM, CPM, has been involved with wasn't immediately apparent. DeCarlo, a managing partner of JD Property Management, Inc., in Costa Mesa, California, was the property manager of the Plaza de Seville, a "tired" 25-year-old, 35,000-square-foot (sf) shopping center in Anaheim, California, where traffic had diminished amid increased competition. The debt-free center's vacancy rate was 30 percent, with more long-term tenants threatening to leave.

Moreover, the 3,300-sf pad fronting the center contained an empty one-story former Wells Fargo bank building with insufficient parking that ruled out a restaurant tenant. (The closed bank branch scenario is one that's being played out frequently nationwide due to banking industry consolidation. "As banks continue to merge, there are a lot of empty places," says Jim Voltz, CCIM, of Voltz Realty Services in Tuscaloosa, Alabama, who represented the seller of a former bank branch on the main thoroughfare of this college town. This year it sold to a bagel shop that will use the old drive-through banking window as a pick-up window.)

In DeCarlo's case, everyone involved with the center agreed that it needed a change, he says. The alternatives included implementing a facelift or complete rehab, converting to offices, offering a new anchor a too-good-to-refuse deal, or lowering rents and giving tenant allowances. At the same time, the owner had commissioned DeCarlo to find a vacant corner on which to build a car wash business for the owner's grandson. However, most of the prospective sites were former gas stations with contamination problems.

"One day, on the way to the client's business for lunch, I stopped at the center to do an inspection," DeCarlo says. "My dad, who was visiting from New York, was with me, and I was explaining my problem with the dying shopping center and my frustration in locating a suitable car wash site. We were sitting in the car facing the former bank building when he said, 'Why don't you turn the bank building into a car wash?'"

After presenting the idea to the client, DeCarlo proceeded with a feasibility analysis. He investigated zoning and parking issues and determined that a 70-foot car wash tunnel would fit through the building—and that the project could qualify as a rehab, avoiding charges such as school and sewer fees. He also researched car wash models and trends in California, prompting the owner to add a detailing department, because the closest competitor two miles away did not have one.

Total costs for the rehab were estimated at about $600,000, DeCarlo says. A feasibility study projected a break-even on 170 cars per day at $5 per car after five months. It also projected 200 additional cars per day in the shopping center—where car wash patrons likely would spend 15 to 20 minutes of "dead time," he says.

However, sailing was not completely smooth. A conditional-use permit from the city secured in February 1995 listed 29 conditions of approval; other challenges included having only 400 amps of power when the business needed 600, "a mysterious sewer line that didn't show up on any city plans," and a long rainy season that delayed the project, he says. However, marketing efforts began early, including offering existing tenants promotions to tie their businesses to the car wash.

In the end, "Puddles" car wash opened in June 1996 after a seven-month renovation process and broke even in its seventh month, DeCarlo says. At Plaza de Seville, only one of 30 available units recently was vacant, and increased net operating income at the center boosted its value by more than $1 million when capitalized, he says. "The car wash has synergized this entire center," DeCarlo says. "The existing merchants are getting more walk-in trade, increasing their sales and their retention as tenants."

Obsolete Retail Property Becomes Prime Office Space
Norman K. Moon, CCIM, SIOR, a broker with Milton Realty Service Company, Inc., in Lynchburg, Virginia, says his clients would do their most recent adaptive reuse project again: "It's gone very well." A former Best Products showroom and warehouse in Lynchburg that had been vacant for several years has become a 57,000-sf office building—after renovators cut 90 new window openings, excavated part of the foundation for a ground-level entrance on each story of the sloped property, gutted the interior, and refaced the exterior, Moon says.

The 30-year-old building had been leased to an office supply distributor that had planned to buy it and then couldn't, says Moon, whose company was not listing the property but was showing it as a buyer's broker. Ultimately he brokered a deal for a partnership that got a contract option at $615,000 for the 2.5 acre site, which had been listed at $795,000. "The land was almost worth what the whole property was [worth] if we could find a use for the building," Moon says.

The client initially envisioned a large drug store tenant, but the building was too big. Moon and the client also knew of a stock brokerage firm that wanted to leave Lynchburg's downtown, but couldn't find available office space. For five months they considered the office use possibility for this unlikely site. "It didn't have any character," Moon says. "It had no windows at all, it was just sort of a big brick box." However, "We said if these guys will commit and sign a lease, we'll go forward," he says.

The brokerage firm decided it could work, although considerable debate transpired over the building's design, he says. After the tenant committed, Moon's client closed on the building in July 1995, needing to have it ready by the tenant's November 1 lease expiration at its existing location.

Construction concentrated first on the stockbroker tenant's space, as well as adding the windows and entrances for all three building levels. A concrete floor added to what had been a graded storage mezzanine also created 10,000 additional square feet. Workers gutted the interior, installing all-new heating, ventilation, and air conditioning (HVAC), plumbing, and electricity; tore out and resurfaced the parking lot; and built tower entrances. The ongoing renovations so far have cost about $1.9 million, Moon reports.

Because the project adapted an existing structure, it was exempt from some new-development-related fees and received a five-year tax abatement from the city on renovation improvements completed in the first two years, he says.

Now, more than 30,000 sf of the building have been leased. "It leased about what we expected, maybe faster." Area office rates average $10 to $12; the building rents at the top of the market, Moon says, ranging from $12 to $14.50 psf net of janitorial and utility services. "After about 20,000 feet were leased, the project carried itself; financially, it's in good shape," Moon says. "It was different from anything we'd ever done, and once it was completed, a lot of people said it was a really great idea."

A Window for Every Employee
Faced with a client's demands for extensive expansion potential and a window for every computer engineer, Thomas Downs, CCIM, of Downs Investment Properties, Inc., in Indialantic, Florida, over a 10-year period and three expansions, has developed a small, 2,000-sf residential/professional house into a more than 13,000-sf high-tech office space. The project hasn't been the most financially profitable that he's developed, he concedes, but it has been rewarding as the relationship prospers.

Downs, who runs investment, development, and property management companies bearing his name, was hired by a start-up computer software company around 1985 to find office space. However, Software Productivity Solutions, Inc. (SPS), had only eight employees at the time, so the space initially had to be for multitenant use and later would be converted to single-tenant use. Moreover, the company wanted all of its engineers to have natural light to boost productivity and health as they sat at their computers all day. "Plenty of office space was available at that time, but nothing could handle the requirements of their expansion plans and window needs," Downs says.

So Downs decided to try his hand at development. He found a small 2,000-sf residential/professional house near Indialantic's beach in an area that previously had been residential but had grown to include zoning for professional offices. While the existing facility would not accommodate his client, its location was ideal, he says, and it offered the opportunity to gut the building and add a second floor. Importantly, its rectangular shape would allow for many windows. Moreover, Downs could buy the duplex next door for expansion and parking.

He bought the building for about $230,000 and spent $300,000 on the initial rehab. He bought the adjacent duplex for $107,000 and in 1991 purchased another parcel across the street for additional expansion. Downs says he now has about $1.2 million invested in the project. In 1987, SPS moved in after the first expansion increased the space to 7,000 sf.

A recently finished rehab and expansion increased the space to 13,200 sf. SPS, now 60 employees strong and Indialantic's largest employer, recently signed a 10-year lease. The company expects to surpass 100 employees in the near future and has Downs hunting for more property.

Unfortunately, "There hasn't been a lot of profitability in this project yet," Downs admits. "It's been more of an experience than profit." The worst hit came in 1991, when he bought the nearby parcel for expansion on a short-term mortgage thinking he could refinance under new construction. However, the company kept changing its expansion plans, and Downs found that a couple of years had passed and he had to refinance the note at a very high interest rate. "If I went back, I wouldn't have purchased the expansion land until it actually was time to expand and they had their plans locked," says Downs, who hopes for improved profitability in the future.

Because he has so much capital invested in the project, Downs says he is considering selling it to increase his financial capacity for other projects; he currently has a $10 million luxury oceanfront condominium project under construction. "My learning curve was a painful and expensive one," Downs says. But "right now, the tenant and I are very proud of this facility and our relationship continues to prosper."

Dentist Sinks Teeth into Former Chicken Restaurant
Milton Thomas, CCIM, a broker with Prudential Commercial Services Carolinas, in Charleston, South Carolina, discovered that it's not always the properties that first come to mind that fit a buyer's bill.

Thomas was representing a buyer who had several dentists' offices in other parts of the state and wanted to open one in an existing building in Charleston. "I assembled all available office properties to show my client," Thomas recalls. "By chance, I put this other site in the package," he says of the one that ultimately suited the buyer. "It really didn't meet his initial criteria for a building."

Although it didn't meet many of his client's parameters, the vacant 3,200-sf former Popeyes Chicken & Biscuits building was in a highly visible location on the corner of a well-traveled road next to an auto dealership. However, the corner was somewhat hard to get in and out of—a negative for a business that relies on a lot of spontaneous customers, he says, so the space had been vacant for four years. "The different companies that had it listed over the years were trying to sell it as a fast-food site," Thomas says. "It just wasn't a good site for that. You've got to look at other uses."

So, in 1995, the dentist purchased the site for $250,000—"a heck of a deal," Thomas says—and spent $150,000 converting the building, basically gutting it. Because none of the walls were load—bearing, he could tear some out without ramifications to the roof, and he was able to reuse the existing HVAC systems, Thomas says, but the new user had to make extensive plumbing changes.

However, the biggest challenge wasn't in the renovation, but the environmental contamination from an old gas station across the street, which had infiltrated the former Popeyes property, Thomas says. Working with an environmental consultant and the local regulatory agency, Thomas and the buyer were able to clear up the liability issues.

The dentist's office opened later in 1995. From a rental rate standpoint, the buyer is "very much in line with where he would have been" if he had bought a true office property, he says.

"It's changed the way I look at other deals for sure," Thomas says of his philosophy today. "The way the retail business changes, you have to think outside the box and come up with other creative ideas on how to use the space. If you can do that, it creates value. We created value in that property where it pretty much had bottomed out."

"Upon Reflection, I Would Have Razed the Old Building"
The main lesson that Frank A. Eichelberg, CCIM, CIPS, of Re/Max Advantage, in Kalamazoo, Michigan, learned from a recently completed adaptive reuse project is that renovating an existing structure may not always work out as well as one hopes. "Upon reflection," he says, "I would have razed the old building and built from scratch."

Eichelberg had sought a site for Aaron's, a furniture rental store in Kalamazoo. After having little luck suggesting more typical properties, Eichelberg proposed a closed A-frame family restaurant with a balcony that had been on the market for a while. "This site appealed to them," he says. The 4,500-sf property plus a basement was less expensive than other sites the company had considered, had good traffic flow, and was in a prominent location. The site also was near the area's two major colleges—a potential source of furniture and other product—rental clients.

Eichelberg paid $230,000 last January for the site and structure, which was made of cut stone and had a good roof, he says. He planned to lease it to the furniture store, but first came renovations and expansion, as the rental business needed at least 7,000 sf of space. "I had to totally gut it, including tearing out the balcony," says Eichelberg, who estimates construction costs at about $550,000—more than double what he had expected. "I thought we could remodel the existing restaurant more easily," he says. "It would have been cheaper to tear it down and build a new structure."

A lesson from the project is to estimate more accurately the costs of all remodeling, he says. "For example, after we got started, we realized that the elevation of this thing is such that we had to spend $30,000 to get handicapped ramps up to the main floor." He also realized he couldn't use 4,000 sf of basement space unless he installed an elevator, which was cost prohibitive. In addition, the overall structure was in worse shape than he thought; the builders ended up tearing out more walls than anticipated.

Eichelberg also ran into trouble with the city of Kalamazoo, which had unreported plans to purchase the property for use as a park for the western gateway to the city. He reached a compromise to proceed, but his building permit was delayed over concerns about the aesthetics of the building, a modern structure adjoining a historic district.

Overall, "The salvation here was that I had negotiated a decent rental to begin with, so that I'm pretty well covered on it," Eichelberg says of the store, which opened this fall. "I added another 1,000 sf I hadn't intended to add, so I'll have more rentable space." Another saving grace was that Eichelberg's son William was the general contractor. "It was a difficult project from the start and my son did a good job of holding the costs down while maintaining quality work," Eichelberg says. "The tenants are delighted, the city seems to like what is being done with the property, so all in all, it looks like a winner."

Barbara Bronstien Stevenson

Barbara Bronstien Stevenson is associate editor of the Commercial Investment Real Estate Journal.Ethical PerceptionsHow do others perceive the ethics of real estate brokers?In a Gallup Organization poll released at the end of 1997 on the perceived honesty and ethical standards of various occupations, 56 percent of respondents rated "real estate agents" as average (though many respondents likely did not distinguish between residential and commercial agents); 3 percent rated them very high, 13 percent high, 20 percent low, and 4 percent very low.In comparison, pharmacists topped the list with 69 percent high or very high ratings, while car salespeople pulled up the rear with an 8 percent rating. Lawyers immediately followed real estate agents with marks of 15 percent high or very high.