Redevelopment

Redevelopment Done Right

Discover how several CCIMs transformed old properties into attractive investments.

V isualizing a historic bank rehabbed as a luxury condominium building, a shuttered mill as a mixed-use development, or an abandoned big-box space divided into office condominiums requires more than a little creativity and foresight. Whether the property conditions, location, or community at first seem undesirable, redevelopment projects hold vast potential for commercial real estate professionals. Making them successful requires CCIMs to convert one person's trash into another person's treasure.

Luckily, Neil F. Schmid, CCIM, broker associate with Hegg Cos. in Sioux Falls, S.D., possesses this skill. Last fall he began transforming an abandoned, run-down hotel into class A office space. The building had suffered from so much wear and tear that it masked the property's potential, Schmid says.

While Schmid's property was old and dilapidated from age and decay, Anthony A. Strauss, CCIM, senior associate with the Welsh Cos. in Minneapolis, needed to use his skills to solve different problems. "Property line disputes caused more than a year of delays. We had challenges of entitlement with both adjacent properties," he says of the downtown entertainment district where he and his team of partners formed Stimson RenoVentures in order to purchase a vacant building from the city.

Diane Carter, CCIM, president of DC Properties & Consulting in Charlotte, N.C., Kathleen Rose, CCIM, president of Rose & Associates Southeast in Davidson, N.C., and Adrienne LaFar, president of Robertson Lee in Lake Wylie, S.C., faced an entirely different problem when they and another partner closed on a redevelopment property in Davidson. Citizens there are quite content with the status quo. "Davidson is a charming, pedestrian-friendly college town with lots of intellectuals who want to preserve everything," Carter says.

Despite the challenges that property conditions, location, and local residents can present, redevelopment projects in cities and towns coast to coast are being transformed from hollow shells to useful properties that add value to their surrounding communities.

Photo caption: The city of Sioux Falls, S.D., granted Neil F. Schmid, CCIM, and a team of investors a facade easement to preserve the original exterior of this 1890s hotel.
photo credit: Neil Schmid, CCIM
Rendering credit: Koch Hazard Architects

The Right Use

Constructed in 1890, the historical property that Schmid purchased with a group of investors had suffered from extensive cosmetic and structural damage including a leaky roof. The hotel operated until 1985, but since then lay vacant. "It had been on the market for nine months and shown to dozens of parties. All bowed out because of the neglected condition," Schmid says. But the building's prime downtown location and 20 on-site parking spaces helped him see through the shabby conditions.

Schmid and his partners quickly discovered that, despite its popularity in recent years, residential condo conversion was not an option for this property. "Loft-style apartments were investigated, but too much of the building's character would have been destroyed," he says. The destruction of one of the property's most distinguishing features - a skylight atrium that accents the second and third floors - would have been necessary to make residential condos feasible.

Research revealed that the property once housed a cigar shop, pool hall, fruit stand, pharmacy, and other businesses throughout the years. Today, the building easily lends itself to office use, Schmid says. Early construction to convert the former hotel to class A office space revealed interior windows facing the atrium. Upon completion, these windows will garnish each office with an atrium view. The original stairwell also will be salvaged and restored, Schmid says.

Preserving the building's faade was especially important since it was the most intact section of the building. "There aren't many historic buildings left [in Sioux Falls]. In the late 1970s there was a lot of urban renewal, so to find a historic building is fairly rare," Schmid says. "Interest [in historic properties] has increased. Community and city leaders are in favor of preserving history while we can."

The city of Sioux Falls granted Schmid and his partners a faade easement to preserve the exterior. Not only did this funding help pay for the redevelopment, but it prevents any future property owners from demolishing, neglecting, or altering the faade, according to the Preservation Easement Trust. The city also awarded Schmid and his partners a seven-year tax freeze and other historic tax credits.

The Right Tenant

Before Stimson RenoVentures bid on the redevelopment of the Stimson building in Minneapolis, developers went to great lengths to preserve portions of the building during city-funded renovations. In 2002, marble used to reconstruct the faade was harvested from the same Tennessee quarry used in the original construction. The city invested millions acquiring and rehabilitating several properties in the area surrounding the Stimson building in an attempt to re-gentrify the neighborhood. "This area was notorious in the 1970s and 1980s because of its high crime rate," Strauss says. The city spent close to $3 million restoring the Stimson building alone.

"This corner [of downtown] is a pivotal spot that has good proximity to retail, office, and hotel traffic," Strauss says. Together with four partners, he formed a limited liability company and entered a development agreement with the city to build the property into an upscale restaurant with a rooftop bar and basement nightclub. Strauss feels the property's location is key to its future success. The building is located in the Hennepin entertainment district, adjacent to the more than 18,000-seat Target Center entertainment venue and a planned new stadium for the Minnesota Twins Major League Baseball team.

The long-vacant 20,100-sf building wraps around the refurbished Pantages Theatre, which the city owns. The bar/restaurant, which will cater to the before- and after-theater crowds, is the building's main tenant. A chance phone conversation with David Fhima, a celebrated restaurateur who owns several local upscale restaurants, led to his coming on board as a partial owner of the building and sole owner of the restaurant. With Fhima on hand, Strauss and his partners succeeded where other teams before them had failed.

"The city had [development] offers from other teams, but they were concerned about ending up with a chain restaurant on this iconic corner. They wanted a property that would complement the theater," says Strauss, who two years earlier worked as a leasing agent on a deal for the same property. "That team couldn't get their financing together and three weeks before the closing, the city rescinded the offer," he says.

This time around Strauss feels confident things will fall into place. "David is known as a chef who can adopt a unique concept, find a market for it, and run with the momentum of it," Strauss says. In addition to the bar/restaurant, an additional 7,500 sf on the second floor is being marketed as retail or office space. "We are looking for a tenant interested in lots of signage. The signage available on the roof is of enormous value," Strauss says.

The city recognized the potential for an independent restaurant to coincide with the adjacent theater. Strauss and his partners feel strongly that having Fhima, a restaurateur and tenant with a proven track record, is what led to the partnership successfully closing on the deal in May. The partners hope to have the restaurant up and running by the end of the year.

Rendering caption: Anthony A. Strauss, CCIM, and a team of investors hope to attract tourists with the upscale restaurant they plan to develop in downtown Minneapolis' long-vacant Stimson building.
Rendering credit: David Shea

The Right Strategy

Carter, Rose, and LaFar closed on their property in March and immediately focused on finding the right concept to unify the buildings with a cohesive marketing and branding strategy. Because the town's residents hold its appearance and integrity in such high regard, the women knew they had to have a carefully planned approach to the project. "Our redevelopment strategy is threefold: to achieve a most desirable urban village where [residents] can work, live, and play," Carter says.

Davidson earned the Environmental Protection Agency's Overall Excellence in Smart Growth award in 2004, partially due to a planning ordinance that requires public involvement and aesthetic regulations for all developments. "This makes Davidson one of the hardest cities in North Carolina to develop property in," Carter says. Up to the challenge, she and her partners formed Urban Organic I LLC and purchased a seven-building, 40,052-sf development with an adjacent plot of land just south of downtown with plans to refurbish and unite the properties.

The first step for the cluster of buildings, ranging from 20 years to nearly 100 years old, is to create consistency for the property both physically and figuratively. "We are going to do some cosmetic exterior work to unify the unique pieces, which will include landscaping, signage, painting, architectural features, and art," Carter says. Included are a former icehouse, built in 1910 and since converted to an art gallery in an earlier redevelopment project, and existing office lofts that will be converted to residential lofts as well as vacant land that will be developed into residential townhomes.

"The office lofts were originally conceived as live/work space in 1998. The developer was and is great at visioning, but he was a little before his time," Carter says. Now the timing is right for urban-style loft condominiums in the small town as in the past six years, Davidson residents have expressed increasing interest in downtown living, she says. The property, located in the downtown art district and along a planned light-rail line that extends from Charlotte, is ideally situated for this type of development.

The women also are working on a unified marketing strategy. "Our goal is to create a project that will embody our philosophy for sustainable urban design, integrating architecture, landscaping, and art," Rose says. To give the development a more cohesive identity, the women named the project South Main Square - south because it is south of Davidson's downtown.

Photo caption: Diane Carter, CCIM, Kathleen Rose, CCIM, and Adrienne LaFar plan to redevelop and unite the seven buildings on this 40,052-sf property in Davidson, N.C., with consistent landscaping, signage, and architecture.
Photo credit: Kris Krider

The Right Price

Figuring out the right purpose, tenant, and strategy for a redevelopment property is complicated enough, but coming up with the capital to rehab a potentially dilapidated property is no easy task either. "It can be difficult to get financing for mixed-use properties. It's just hard for investors to wrap their head around it," Carter says.

Carter, Rose, and LaFar obtained private funding from a lender for the project's face-lift. The group made a special effort to include as many women and CCIMs in the project as possible. Two other CCIMs were involved: Kevin Jenkins, CCIM, vice president of Northmarq Capital in Charlotte was the mortgage broker, and Garth K. Dunklin, CCIM, an attorney with Wishart, Norris, Henninger & Pittman in Charlotte was their lawyer.

Although obtaining financing was one of the biggest challenges of the project, the women developed an effective plan, Carter says. "We used a branding and marketing strategy to communicate our vision, the redevelopment component added value to the project, and the new development component added value as well. [The lender] believed in our vision," she says. After selling the office condos and townhomes, Carter and her partners plan to retain the remaining income-producing components, including office suites, retail, an art gallery, and a restaurant.

When complete, the project will cost between $15 million and $20 million, Carter says. "The before value and the after value showed us that the sum value of the property is much greater than the parts. There will be a great return on this investment," she says.

Since the project is in-line with the town of Davidson's objectives for creating a South Main Street arts district and the development includes several art galleries and signage that incorporates it with the area's artistic aesthetic, the town is supporting the effort with street improvements. But the majority of the project is privately funded.

In Minneapolis, the Stimson RenoVentures LLC partnership also is privately funded. For acquisition and development of the Stimson building, the group needed $6 million - $3 million debt financing from a commercial lender and $3 million equity contributions. "The hardest part of this project was keeping everything moving and in place with the investors. We had to keep moving the closing date and other deadlines. You feel like you're on shaky ground until the closing," Strauss says.

Any redevelopment project is a financial gamble - the projects are unpredictable by nature - but restaurants are particularly risky, Strauss says. "Restaurant sales are very speculative. We expect 5 percent to 6 percent rate of return," he says. Sixty-one percent of independently owned restaurants fail within the first three years of operation, according to an Ohio State University study. "It was difficult because of the limited income potential. This is an expensive project and the investor group is really banking on the success of downtown real estate."

Ownership of the Stimson building is divided into two groups: 60 percent is class A investors who contributed $100,000 or more, and 40 percent is class B investors including the partners themselves. Class A investors receive "100 percent of cash flow after debt service and operating expenses" until they have been reimbursed, according to the project's executive summary. The partnership predicts that Fhima's restaurant will bring in $5 million annually, increasing by 2.5 percent per year. In addition, Fhima will pay $15,500 per month in rent to the partnership under a 15-year lease term with an option to renew for two more five-year terms. In the end Fhima will receive 15 percent ownership of the property and needs to generate $2.6 million in cash flow before his shares have cash value, Strauss says.

Second-floor tenants are expected to pull in $15 per square foot. "This is a little above market value for class B office space, but we are offering class B office space with class A signage," Strauss says.

In South Dakota, Schmid put together a group of 12 investors to finance the $1.1 million property acquisition and redevelopment. He expects a before-tax return of 20 percent for investors. The investment group includes the first-floor tenant he found last fall, a law office that signed an equity-lease agreement. "It was very important to the tenant that she own her own space. This way she gets a percentage and is essentially leasing from herself," he says. While the law firm moves in this spring, the investment group is still seeking additional office tenants. It's difficult to pre-lease the space because interior reconstruction is underway and tenants like to see the finished product, Schmid says.

In order to get the additional financing he needed for the project, Schmid wrote up a proposal using a template distributed in one of his CCIM courses (www.ccim.com/resources/toolbox/busforms.html). He brought the proposal to 10 different lenders. "I got positive feedback from all the lenders. It was fairly easy to get the financing. The equity was enough to satisfy them," Schmid says. The facade easement the city granted to Schmid and his partners requires that they retain ownership of the property for seven to eight years. "Some of the owners are used to buy-and-hold properties where you redevelop, stabilize, and hold; that isn't really the case here," he says.

The Right Mix

Aside from the obvious, each of these projects has something important in common. Strauss puts it best: "My role in this project is developing with the help of investors, fundraising, brokering space, acquiring the property, seeing everything through, basically wearing a lot of different hats." Any commercial real estate professional who takes on a redevelopment property should be prepared to play several different roles.

"Our project involves repositioning, branding, leasing, property management, and development," Carter says. The results often are great sources of pride and achievement - and, ideally, revenue - for those involved. "We wanted to find an income-producing property; finding a property that had a redevelopment and new development component was really unique - it doesn't happen very often," Carter says.

For Schmid it was the satisfaction of preserving an older property. "This is one of the oldest properties in town. If we hadn't come along, in the next five years it would have come down. Our motive was saving the building," Schmid says.

For Strauss, having a hand in something that added value to the city was ultimately worth the challenges. "Redevelopment projects have a lot of hair on them, but it's so rewarding to see the added value in the community," he says. "The hardest part is remembering that the project isn't just a labor of love."

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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