Flex-Office Project Sets New Course After Short Sale and Planned Repositioning

This isn’t the best of times to bring a speculative project out of the ground in most markets, but that doesn’t mean that there aren’t other compelling opportunities out there. Case in point: a joint venture (JV) between Los Angeles-based Kearny Real Estate Company and TriGate Capital of Dallas. The JV acquired a vacant 74,000-square-foot flex/research and development building in the Rancho Bernardo submarket of San Diego in a short sale and is moving forward with its repositioning.

“The property was being marketed for sale or lease at prices that were simply not realistic from an investment perspective given the condition of the building, which was in need of significant common area and tenant improvements,” said Jason Rosin, vice president of Kearny. “At the same time, the then-owners and brokers were working out a deal with the bank to arrange a short sale. The broker contacted us with a price at which they thought they could get the deal done — $6.8 million, effectively $.68 on the dollar on the debt. At 40 percent less- than-advertised pricing and approximately 50 percent of the total invested capital, the property was very attractive. Given the short sale structure, the bank made it very clear that there was no room in the number so we moved forward.”

Rosin said that the previous owner of the building was also its tenant. That company went into bankruptcy and the building was significantly distressed. However, despite that distress, the project had a lot to offer: “With the flexibility to go to 100 percent office, it is ideally suited to provide typical R&D/flex build-out in the 40 to 60 percent range with a combination of drop ceiling conditioned R&D space and high-bay warehouse. On top of that, the building has unique attributes — good freeway and street visibility, parking with ample grade-level loading and drive-around access. The building also has the flexibility of being leased as either single-tenant or multi-tenant space. The space has limited competition for a tenant needing around 75,000 square feet in this market with identity and flexibility,” explained Rosen. Kearny had been fond of this building and looked at it when it was for sale for almost $12 million just a few years ago. Understandably, the firm was positively enamored with it at the new lower price. “We like our basis at $92 per square foot and we don’t expect to see many opportunities at this pricing for comparable assets in this market,” said Rosen. Kearny is enthusiastic about the Rancho Bernardo I-15 corridor market in San Diego. The company anticipates that the tech sector will be one of those leading the area and general economy out of recession.

Out With the Old and In With the New

Built in 1984, the building has undergone several renovations and has approximately 30,000 square feet of new state-of-the-art office, which the previous owner had built. It also contains about 20,000 square feet of older generation office space. “We will demolish about 8,000 square feet of that space and open up the building so that when tenants walk through they are not confused by a labyrinth of old, dilapidated office space. It will be a clean look and people will be able to visualize what they want in the area.”

Existing improvements include a 70- seat theater, fully equipped kitchen and a gym with shower and changing rooms. The building also includes such sustainable features as automated lighting, super insulation and waterless urinals.

Maximizing Improvement Dollars

“We will probably spend two million dollars on this project between enhancements and tenant improvements,” said Rosin. “There was considerable deferred maintenance. New landscaping, including replacement of diseased trees along the front, will be completed along with repairs and reseal of the parking lot. Facade work will include new glass at the main lobbies to give the building an updated appearance. The value-add investments we are making will provide an immediate visible and tangible improvement to the building.”

Once the landscaping and parking lot repairs are completed—even without the facade work—the difference in the building will be like night and day, according to Rosin. “Landscaping is a relatively inexpensive way to give the building a facelift,” he said. “The glass work will add even greater appeal.”

The building is currently getting attention from prospective tenants who would take all of the space, as well as from tenants who are looking at taking less space if the building were to go multi-tenant.

Success with Sustainable Development

While new speculative development may be off the table, some areas to carefully consider are brownfields redevelopment, reuse of dilapidated old manufacturing plants and renewable energy projects. For many of these types of projects, there are tax abatements and tax credits available plus the full cooperation of all levels of government.

A prime example of success in these areas is James F. Jacoby, founder, chairman and chief executive officer, Jacoby Group, headquartered in Atlanta, who spoke at the October Development ’10 conference in Orlando.

Jacoby started in 1975 doing traditional retail center development. In more recent years, the company has focused on initiatives that include mixed-use development, geo-communities and greenspace preservation, as well as ventures in healthcare research, environmental and alternative waste-to-energy technology. “In undertaking these types of projects, the first thing on your checklist is to create public-private partnerships. You have to have that involvement,” noted Jacoby.

A major endeavor for the firm today and one that could have positive ramifications across the United States is the conversion of old automobile plants into alternative energy manufacturing plants. This could be wind, solar, gasification or electric vehicles. “We are looking at one old manufacturing plant to produce an electric cargo van. One model would be for firms like Federal Express,” he explained. “It could also convert diesel school buses into electric school buses or hybrid electric-diesel buses. There are all different types of things that we could put into these closed auto plants.” Over the years, Jacoby’s company has looked at many of these old plants for possible “smart growth” type redevelopments. Now he is revisiting them for possible use as energy production plants. He estimated that getting one of these old plants up and running would take about six months and would be welcomed by the local community. By contrast, in order to build a new plant for the same purpose, it would take at least two years to get the permits done.

Jacoby is also looking at other energy-producing and recapturing projects such as using methane gas from landfills. One of his companies is Geoplasma LLC. The company takes garbage and heats it up thousands of degrees until it becomes a gas. The gas then becomes a fuel. The project is a net energy producer. That is, once garbage is turned into gas, about 25 percent of it will be returned to the plant to fuel it while the remaining 75 percent can be used to make steam or electricity. The company is working on a facility now that will process 600 tons of garbage a day.