Finding Value in Vacant Properties
Creative Reuse Strategies Transform Abandoned Structures Into Viable Real Estate.
Despite its run-down exterior, the 125-year-old brick property located at Kingston, N.Y.'s busiest intersection evokes many fond memories. “Depending upon who you ask in town, it's the old Chevy dealership, a pool hall, an Army/Navy recruiting office … but I remember it as a dance club when I was growing up,” says Joe Deegan, CCIM, principal broker of Deegan-Sanglyn Commercial Real Estate. The disco proved to be the property's last dance: It sat virtually dormant for two decades.
When the parcel appeared on Kingston's tax sale list last year, Deegan saw an opportunity to revive a local landmark. “I knew this eyesore could be dressed up and reused the way it should be,” he says. Deegan purchased the vacant property, which currently is under renovation, and inked a lease starting in 2004 with a local furniture retailer. “It's a great fit for the tenant and for the city,” he says.
Few communities are free from vacant structures that blight their central business districts, industrial parks, and residential neighborhoods. Despite their quiet existence, unoccupied buildings have widespread detrimental effects. But these unsightly properties often can provide new opportunities for local commercial real estate professionals and help bolster their communities' tax base. With the right approach, brokers and developers can transform abandoned buildings from local blemishes into thriving new properties.
Tax Sale Turnaround
Tax forfeitures provide excellent opportunities to buy vacant properties at below-market prices. Though he never had worked on an adaptive reuse project, Deegan couldn't resist the idea of a bargain. “What can you buy in Kingston for under $100,000? Not much!” he says. His $75,000 bid fell well below market, but the property was saddled with a hefty Internal Revenue Service tax lien. Past-due taxes can add months or even years to a sale's time line and, for many projects, add to the purchase price. “Fortunately, we were able to significantly reduce the back taxes, and negotiations only added a few months,” Deegan says. After receiving clear title to the property, he rolled up his sleeves and went to work.
Situated on one-third of an acre, the four-building property totaling 15,000 square feet had marketable qualities. Its location in the town of 23,000 people offers “great access, high visibility, and a traffic count of about 10,000 cars per day,” Deegan says. Since the property had been a car dealership on two different occasions, a phase 1 environmental test was necessary. “We had to remove a buried oil tank, but thankfully there was no leakage or cleanup. The property was used mostly as a sales display facility, not an auto mechanic shop,” he says. The parcel's broad-based commercial zoning was suitable for any number of office, retail, or light industrial users, and though they needed some repair, the buildings were structurally sound.
But the process wasn't entirely glitch-free: “Parking was a major, major problem,” Deegan says. The site had six parking spaces — a far cry from the city's 26-space requirement — and additional parking was critical for marketing it to prospective tenants. After assessing the options, including on-street parking, Deegan found a solution. “Two of the buildings had some water leakage and rotting floors, so it made sense to get rid of them to make room for parking,” he says.
However, the decision to raze wasn't only his to make. Before demolishing any of the structures, he had to obtain local and state historic preservation groups' approval. Originally constructed in 1884, the property's 1930s-era brick façade and interesting heritage kept the preservation groups involved in its well-being. “Though it's not on the historic register, we had to explain our reasons and the need for additional parking to get demolition approval,” Deegan says.
The proposal focused on ingress/egress and traffic flow improvements, rather than the property's future use. “At that time I didn't know exactly what we were going to do with it,” he says. The committee approved his request, and the city subsequently granted Deegan a zoning variance. “Even though we were only able to get 19 [total parking] spots, [the city] was happy to see the property was going to be used at all,” he says.
Once the parking problem was resolved, Deegan focused on tenanting. Capitalizing on the property's excellent visibility and location, “I had a local retail business in mind,” he says. The timing was right for a change: The furniture retailer's lease term was coming to a close, and the owner was interested in the new location.
With about $300,000 to $400,000 invested in the project's renovation, Deegan is glad he bought the property and confident the business will flourish in its new locale. “The furniture store works well with the overall design of the property, the parking is good, the location is good — it's just an all-around excellent fit,” he says.
The Great Divide
Creative thinking is another catalyst for turning vacant properties into productive ones, says John Levinsohn, CCIM, president of Levi Investment Realty in Carmel, Ind.
A 275,000-square-foot industrial complex weighed heavily on the soft Indianapolis property market for more than a year. In 2001, bankruptcy foreclosure shuttered Furrows Building Materials' distribution hub. Yet the property offered good access to major roadways, immediate proximity to a CSX rail line, and five structurally sound, flexible industrial buildings. “I kept asking myself why this was sitting vacant and unsold,” Levinsohn says.
The property's functionality and location weren't the reasons. Indianapolis had few single-tenant users that could occupy such a large, five-building space, Levinsohn says. Yet the bankruptcy court ruled that the property was to be sold as one unit, and the appointed liquidator's appraisal came in at about $6 million. “As a local broker, I knew the price wasn't accurate for this market,” Levinsohn says. Using non-local sales comparables, the liquidators had achieved a grossly inflated value that continued to seal the property's vacancy.
Levinsohn studied the market and the property's future-use potential. “Since it consisted of five different buildings ranging in size from 8,000 sf to 160,000 sf, I started to realize that it really wasn't just one property,” he says. By purchasing and subdividing it, Levinsohn could create a small-scale industrial park and market the individual buildings to businesses seeking small to mid-size manufacturing or distribution space.
The idea might have enticed several lenders in a thriving economy, but not in the midst of a downturn. Levinsohn developed a polished presentation complete with property photos, detailed plans for subdividing the property, and a flexible sales/leasing strategy that allowed users to buy, lease, or lease with an option to buy individual parcels. But without a tenant securely in place, lenders would not touch the project. Even his solid track record and credibility in the local market weren't enough: “Every single lender I'd done business with said, ‘Show me your next deal,'” Levinsohn says.
Finally, he convinced a local community bank of the project's potential. “The key was to find a lender who also believed in what this property could be,” he says. Yet there was inherent risk: Levinsohn was required to sign a personal loan guarantee. In exchange, the lender agreed to underwrite mortgage release clauses should Levinsohn find his desired lease-to-own tenants. “I really wanted the flexibility to eventually sell off the individual properties.”
Bankruptcy foreclosure sales often are lengthy due to the bidding process and counteroffer waiting period, which ranges from 60 days to 90 days, Levinsohn says. The bidding process spanned about six months, and despite the property's inflated valuation, Levinsohn and a partner purchased it from the bankruptcy liquidator for the bargain price of approximately $2 million.
Vacant for more than a year, the property needed work. “Since it was sold to us as-is, we kept finding more and more new problems,” Levinsohn says. Aging systems, such as the sprinkler valves, were rotting, and the skylights leaked water. A few of the buildings still contained the previous owner's equipment; large, junk-filled trash bins dotted the grounds; and the entire site was overgrown with grass and weeds. “Most of the problems [concerned] the exterior and how we could make it look better,” Levinsohn says.
Boosting curb appeal started with resurfacing and striping the parking lot, adding new lights throughout the buildings, and landscaping the overgrown grounds. A phase 1 environmental test didn't uncover any contaminants, so only the defunct equipment and trash bins needed to be removed.
After the property was cleaned up, “I [offered] space that was well below market price and hoped to get tenants interested based on price alone,” Levinsohn says. The lease-to-own structure offered another incentive for potential tenants interested in the prospect of future ownership.
An Ohio-based wood products distributor seeking to expand to Indianapolis leased three of the buildings, primarily due to the adjacent CSX rail service and on-site storage capabilities. A local drywall distributor looking to consolidate two facilities into one location leased the remaining two buildings and expressed interest in the lease-to-own terms.
Levinsohn didn't originally envision splitting the property between just two tenants, but it worked better than he could have imagined. Already the property legally was divided into two distinct parcels, each of which fit the tenants' requirements. Both parcels had major roadway access requiring no additional easements. The only common area between the tenants was split along the parcel line with a fence.
“The real appeal to me was the fact that this property was divisible, but no one else wanted it because it appeared to be a single-tenant space,” Levinsohn says. “Everything really just fell into place. I wish all my deals went like this!”
Reclamation Is on the Rise
Vacant properties come with their share of problems, and many times demolition seems like the best solution. Yet national and local reclamation efforts are growing, which could spark new opportunities for commercial redevelopment projects.
A coalition of organizations recently banded together to launch the National Vacant Properties Campaign. The group's mission is to increase public and municipalities' awareness of vacant properties' detrimental effects and to serve as an educational and training resource on reclamation and reuse.
Many local communities are taking action as well. For instance, Genesee County, Mich., used a new state tax foreclosure law to reclaim more than 2,100 vacant properties in the Flint area; about 1,800 sites are slated to return to productive use. Internet-based programs also help some municipalities track vacant properties in large cities such as Los Angeles and Philadelphia, as well as smaller markets like Garland, Texas.
Though reuse is more widespread in high-growth regions and first-tier cities, some strong secondary and rural markets are seeing an increase in vacant property rehabilitations, says John Bailey, research director for Smart Growth America in Washington, D.C. As reclamation awareness and funding increase, he predicts more public/private partnerships and private redevelopment opportunities will become available.