What started out as a simple build-to-suit transaction for a Rite Aid ended up being a six-year process that resulted in a shopping center owned by a labor union.
While dramatic, change is something you need to expect when you are involved in a commercial real estate transaction, regardless of whether you are the buyer or the seller.
“This particular transaction was unusually long, but it is not uncommon for it to take two to three years,” says Robert Cooper, vice president of CB Richard Ellis. “It is a long process. It requires a high degree of flexibility on the part of the owner. Municipalities dictate certain requirements.
“We had to make $100,000 in changes, which changes the rental rates we were quoting for the shopping center. Everything lies on top of each other. You really need to be focused on the long-term objective. There will be some nicking going on along the way, and it really requires a lot of flexibility.”
Take the Rite Aid case, for example. Cooper was investigating a parcel of land at the corner of West Market and Hawkins in west Akron as a potential site for the chain. The parcel, which had a small shopping center, was privately owned but leased to a branch of the United Food and Commercial Workers union.
In 1998, the union purchased the parcel, intending to demolish the shopping center to make way for the Rite Aid.
After almost two years of negotiations on financial details and zoning issues, the union, Rite Aid and the city of Akron reached an agreement. But shortly thereafter, Rite Aid’s stock price collapsed, and all deals in progress were halted.
Rite Aid never built on the site, the original shopping center had already been demolished, and now the union owned an empty parcel of land in a high-traffic area.
The flexibility had just begun. Cooper started looking at how the union could get the most out of its investment. The property and the adjacent office building. also owned by the union, were analyzed to determine the condition of all structures, and the leases and operating expenses were examined to create a financial model in the event the UFCW decided to sell the entire property as a package.
In the middle of all this, UFCW workers went on strike in California, costing the union millions in associated expenses. The union leadership began having second thoughts about developing the property.
“In 2003, we briefly considered an offer to sell the building and vacant ground to a local buyer, but later determined that a higher value could be obtained if we went ahead and developed the shopping center,” says Cooper. “We further determined that the property’s special location afforded the UFCW an opportunity to earn greater income once built-out, versus a one-time sale. We expect to have the entire center leased prior to construction.
“Upon completion of the center, the UFCW will decide if they want to sell the project, capitalizing on the current buying frenzy for small, well-leased shopping centers, or hold the project in its investment portfolio.”
Staying flexible and having a good relationship with your real estate people are key to getting a transaction completed. Market conditions can change dramatically in a short time.
“The longer a deal is out there, the more vulnerable it will become,” says Cooper. “That’s why the relationship side is so important. How to reach: CB Richard Ellis, (330) 253-1702
Transaction factors
There are a lot of variables in a commercial real estate transaction that can affect the final outcome. Here are some tips from Robert Cooper, vice president of CB Richard Ellis, on some things you might encounter.
* Be prepared for change. Someone will probably object to some portion of your plan, whether it is city officials or homeowners in the area. As a result, you might have to change anything from the look of your building to the number of entrances allowed from the road.
* If selling, consider all the options. One property might be worth more if it is fully developed and leased, while another might be worth more as an empty lot. Make sure you run all the projections so you are maximizing your return. The same goes for setting rent rates. If you are investing money in developing the property, make sure your rental rates will give you the necessary return.
* National bond-rated tenants provide for stronger financial stability and make your investment easier to sell.
* Get the right tenant mix. Having every tenant doing peak business at the same time of day can create parking problems. Mixing businesses that do most of their business at different times can make everyone happier.
* Be realistic with cash requirements. “People are oftentimes unrealistic with what the front-end cash requirements are,” says Cooper. “It’s easy to lie to yourself. Architectural costs are real.”
