Redevelopment

Extreme Makeover

CCIMs turn property redevelopment dreams into reality

The extreme makeover is omnipresent these days. Reality television show contestants with less-than-perfect features are given facelifts and tummy tucks. Dated homes are made shiny and new with fresh façades and rehabbed interiors. The message is clear: Everything around us has the potential to be better, or at least has room for improvement. Commercial real estate is no exception. Tired properties are granted new leases on life when they are transformed –- often into new incarnations that change their use and increase their leasing potential.

Making over a property into something other than its original purpose isn't an easy task, but it's one that many commercial real estate professionals find rewarding. “To me, old, abandoned properties are like orphans. I like to take them under my wing, nurture them, and bring them back to life,” says Stuart W. Silver, CCIM, owner of Silver & Silver & Silvers in Fort Myers, Fla.

Silver and three other commercial real estate professionals share their extreme property makeover stories.

From Big Box to Power Center

Before: Vacant inline shops
After: Multitenant retail center

Larsen Baker, LLC needed to find a new use for a struggling retail strip, anchored by an abandoned Home Depot and a closed inline Walgreens, located on a prime slab of Tucson , Ariz. , real estate. When weighing their options, the company quickly recognized the benefits of making over the existing property rather than tearing it down and starting over. “There is a big advantage to property owners, because municipal governments like to see old buildings redeveloped,” says George Larsen, CCIM, principal of Larsen Baker. “Cities will provide developers with more leeway on remodels than they do for new construction.” The stringent codes that new construction must meet regarding building setbacks, signage, parking, and landscaping were not necessary for the redevelopment project, Larsen says.

Ultimately the big-box space was transformed into a 163,000-square-foot power center that included national tenants such as Michaels, Ross Stores, Sports Authority, HomeGoods, Lane Bryant, Office Depot, and Starbucks, among others. The project took about 18 months to complete. “The remodel kept the bones of the building and added a 42-foot tall façade,” Larsen says. Tenant improvements and a new building on a parking lot outparcel were included in the construction costs.

Upon completion in September 2004, the center was appraised at $23 million, according to Larsen. The center, which had been 85 percent vacant before redevelopment, reached 100 percent occupancy post-makeover.

Larsen offers this advice to prospective redevelopers: “Work backward from the market rents to determine if the deal will make money. Rents for remodeled projects will be 10 to 20 percent lower than the rents for new construction.”

Lofts Rise in Bakery Space

Before: Bakery and warehouse
After: Loft-style multifamily units

W.B. Gallman, CCIM, principal of Miller-Gallman Developers, is a property makeover veteran. “Our company has converted a commercial laundry, a department store, a furniture store, a textile mill, an office building, two meat processing plants, and an auto parts warehouse into housing … over the last 20 years,” he says. Additionally, his company was the first to develop multitenant loft space in downtown Atlanta in 1983, he says.

A recent project, a 76,224-sf bakery and warehouse built in 1930, was converted into eight townhouses and 52 separate loft spaces, ranging from 800 sf to just under 2,000 sf. The redevelopment project took only 10 months to complete because the building was in pretty good shape, Gallman says. “We did have a lot of concrete saw cuts to create combination light/stairwells for the townhouse units and concrete coring for running chases and pipes,” he says. The building is designed for condominium conversion in five to 10 years.

The purchase of the property was unusual, Gallman says. The father and son owners both wanted to contribute half of their equity in the property to the development and receive cash for the other half, Gallman says. They also created a private placement limited liability company to raise equity and transfer the federal historic rehabilitation tax credits to an institution in return for equity. Rent projections were slightly lower than typical for Atlanta multifamily properties because the units' open floor plans lacked separate bedrooms.

To finance the rehabilitation, the construction manager obtained a bank loan with an interest rate of 8.75 percent to 9 percent amortized over 25 years.

Gallman advises anyone rehabbing a historic property to consider the costs carefully. “Even if the numbers look good, we always budget a very large contingency expense for both architectural and construction costs because there are always surprises when you start looking behind and under decades-old walls and floors,” he says.

Property Cleans Up for New Use

Before: Gas station
After: Dry cleaners

The building at 3021 Mockingbird Lane had been a gas station since 1926, but when Jared Caplan, CCIM, vice president of development for Cencor Realty Services in Dallas, began to investigate the property for a client, it became clear that other possibilities existed. Caplan considered three options for the 7,500-sf lot: Acquire surrounding property and develop a multitenant retail center; lease the free-standing 1,674-sf building to a single tenant; or redevelop the existing building and lease it to multiple tenants.

After researching the property and talking with the current owner, Caplan discovered that the lot sat on the border of Dallas and University Park and was zoned for community service use, which allowed for a variety of retail options. Ultimately, with confidence that the market would supply a tenant, Caplan's client decided to purchase the property without one lined up.

However, the property had its share of flaws. First, Caplan had to resolve its environmental problems. The previous owner removed the underground gas storage tanks and obtained a letter from the Texas Natural Resources Conservation Commission for the environmental problems that existed prior to the property's sale. Caplan also arranged for an environmental company to remove the station's hydraulic lifts. The gas pumps also were removed and sold to another company for more than $10,000.

In addition, the property, which was built about 80 years ago, included a section that was constructed about 30 years ago. The addition was separated from the original building with a wall that had varying ceiling heights. In order to even out the structure and make the space more useable for prospective tenants, Caplan hired an engineer to put in an I-beam.

Functioning as the client's asset manager after the purchase, Caplan set out to accomplish two goals for the new owner: “attract a tenant that could pay enough rent to maximize the cash flow and minimize the short-term need for capital and, at the same time, drive the need for improvements to add value to the property.” The Weitzman Group, which was hired to find a prospective tenant, found Hanger's dry cleaning. The company signed a five-year triple-net lease for $6,000 a month.

Low Rent, Big Returns

Before: Laundry facility
After: Mixed-use facility

When Stuart W. Silver, CCIM, bought an old laundry facility with five “banged up” buildings on five acres, he found that the four smaller buildings didn't present much of a leasing challenge. “There was a market for free-standing places. A lot of paint, some plumbing, some electric, some roof repairs, and general repairs, and they were leased,” Silver reports. But the larger building, a 60,000-sf warehouse with 7,000 sf of office space, was more daunting. “The biggest rehab I had ever attempted before that was 22,000 sf, and it took me months to get adjusted to a building of that size,” he says.

Silver originally advertised the property as a mixed-use warehouse and office space. But after getting no response, it became clear he would have to offer it in smaller units, which increased costs. “The smaller we made the units, the easier [they were] to rent out, and the more costly the rehab. When I got down to 2,000-sf units, the rehab would have cost more than the original purchase price,” Silver says.

After speaking with about 100 prospects, Silver discovered that potential tenants were more concerned with price than space. “I realized that if I could come in at $2,000 to $2,999 per month, I could rent all my space,” he says. Ultimately, the building was divided into three units: a 32,000-sf space, a 13,000-sf space, and a 22,000-sf space.

It took an additional six months to finish the project, but Silver found his tenants — a dog daycare center, a church group's indoor paintball course, and an automotive repair shop. Gross rents were $2 psf or less. But of the $150,000 in rehab expenses, $50,000 would come back in rent. The other $100,000 was out-of-pocket. The property was purchased for $400,000, so the total expense was $500,000. The net operating income was about $100,000, allowing for a 20 percent return the first year.

Advertising low rents is the key to getting tenants on a project like this, Silver says. “Listen to your customers; it can go a long way to solving the problem of renting large, old buildings and changing them in to multitenant properties,” he advises. Extreme makeovers are trying but potentially rewarding experiences; creating something new by working with the structure of something old takes time, patience, and a team of experts. But in the end, the results are worth it. Silver sums it up well: “Just because a building is banged up a bit is no reason to throw it away.”

Carolyn Bilsky

Area report is written by Carolyn Bilsky, associate editor of Commercial Investment Real Estate. Contact her at (312) 321-4507 or cbilsky@cciminstitute.com.

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