Deep Value-Add Redevelopment

By RJ Johnson November 12, 2018

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Deep Value-Add Redevelopment Video Example

In this video, we’re going to give an example of what Tri-Land means by Deep Value-Add Redevelopment*.

Deep Value-Add Redevelopment*

In this video, we’re going to give an example of what Tri-Land means by deep value-add. It is important to understand that we just don’t paint the pig or update parking lots or even update a façade. We truly reposition these centers and bring new life to them. We work closely with local government and communities to help develop these properties. Since 1978, we’ve completed over 60 million dollars in TIF and other like government incentives. In the case of Fridley market in Fridley, Minnesota, we already knew that the local government wasn’t open to this concept, but we decided the project was worth moving forward on. In this example, we’re going to show you how we took a 165,000 square foot shopping center and reduced the footage to 150,000 square foot shopping center and still created a great investment opportunity for the investors.

Population density is the key to success for our strategy. The more people that visit the site repeatedly allows us to charge higher rents for smaller spaces, and grocery works exceptionally well for this strategy people typically people will take weekly trips to the shopping center. Next, we apply our quarter cell analysis, which was developed while at Jewel Food Stores in the 70s. This model helps us evaluate trade areas and store performance. It helps show the impact or the erosion from other stores within the network and helps project food sales from given locations. This gives us a quantitative reasoning for wanting to be in a particular trade area and can help us identify the actual piece of real estate within a specific trade area. We like Fridley Market because of its high density population in north Minneapolis suburbs about six to seven miles from downtown Minneapolis, as you can see on this picture.

It’s located right of the Clover Leaf Exchange directly off University Avenue or Highway 47. You can see that Highway 47 or University Avenue is a spine that runs north-south all the way along side the Mississippi down to Minneapolis. University Avenue has service roads for six miles, so direct access off University is challenging. That is one reason why we like this property was the access available off University Avenue. Interstate 694 and University Avenue both have great traffic counts, offering visibility to Fridley Market. Since it is right off the highway, it serves as both local and regional traffic, which is good for our tenant strategy. The property was situated on 15 and half acres and was about 165,000 total square feet. Cub Foods, the number one grocer in the market, occupied about 106,000 square feet. Owned at the time by Super Value, there was an in line McDonald’s and a state run Fridley Liquor Store. In addition, there was a 43,000 square foot Gander Mountain located on site. What wasn’t included was the Holiday Gas Station up on the northwest corner and the CVS located on the northeast corner.

In review in the aerial, you can see the CVS on the corner and the Holiday Gas Station. This property really out-positioned Home Depot. That just goes to show how difficult it is to get access on University Avenue. You will notice there are dual left turn lanes from University Avenue onto I-57 as well as easy access onto the property with three curb cuts. The Fridley Market property was well-positioned, had great visibility from the expressway, and had easy access into the shopping center. You could see here the in-line McDonald’s and the vacant Gander Mountain. The anchor tenant was Cub Foods, who occupied about 104,000 square feet. At the time, Cub Foods was building stores roughly about 65,000 feet, so the Cub negotiation goes like this. We’ll reduce the store to 63,000 square feet, and you keep the same annual rent that you’re paying today. The annual rent in which Cub was paying was $8 a square foot, which after reducing the size to 63,000 square feet, it brought up the rent to $17 per square foot for a 20 year term. To help reduce building risk, Tri-Land put up the dividing wall and Cub did their own interior remodeling. Also, Tri-Line got its pro rata share for common area developments, which equated to about 1.5 million dollars from Cub.

Here we go. We put up the dividing wall, which allowed us to cut back a portion of the store to allow for an out lot development. We did an $80,000 ground lease with McDonald’s and had them build their own store. We reduced the shopping center from approximately 160,000 to 130,000, which allows us to develop to separate out parcels, which you’ll see soon. As you can see from the aerial, the shopping center is under construction and being redeveloped to maximize space. Here you can see new parking lots, updated lighting, and the new Cub Foods store opening. Here is the renovated Fridley Liquor Store. As you can see, we’re still renovating part of the shopping center while some of the tenants are open. We had some leasing up to do, so you can see we negotiated with Duluth Trading Company. About 15,000 square feet right next to Cub. In the back of the shopping center, we negotiated a deal with Tapanaki Grill, which was an Asian buffet style restaurant, for about 15,000 square feet.

Here you can see the downsizing of the building back from 160,000 square feet to 130,000 square feet, which allowed us to build not only one but two separate out parcels. One was for the McDonald’s, and the second was for an 8,400 square foot multi-tenant building, which consisted of Caribou Coffee, Einstein Bagels, Spring, Panchero’s, Great Clips. These are roughly $30 rents and serve what we call street-retail purpose. Under 3,000 square feet quick service restaurants, drive-thrus, coffee, etc, or Amazon proof companies. Our biggest concern when trying to lease up was the visibility from University Avenue, so we did a deal with CVS to install a new pylon sign right on the corner. We built the pylon sign and paid for it. We agreed that CVS would be at the top of the sign, and we would put our street retail tenants below them. Our negotiation was successful, and it was a win-win for all tenants. You can also see we built a pylon sign right off the expressway ramp.

I’m not sure if you noticed this yet, but there was a two and a half acre parcel, which most everyone wrote off and said nothing could be done with. We ended up selling it to Woodsprings Suites, a limited service hotel operator, who built a six story, 105 key room hotel. They just wanted highway exposure, and this site was great for that. As you can see from the aerial, the property was redeveloped and enhanced with a hotel. The property reduction allowed us to add two separate out-lot buildings. That is what Tri-Land considers deep value-add, so this is how you take a 165,000 square foot shopping center and reduce it to 150, 000 profitably. The property was purchased at 72% leased for approximately 14 million dollars. We sold the property in December of 2016 at about 80% lease so that we left a little meat on the bone for the new buyers. It sold for 26 million dollars, returning about a 28.3% IRR, and that is what Tri-Land considers deep value-add repositioning.

 

 

*IMPORTANT DISCLOSURES:

THIS IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY A SECURITY.  PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. INVESTMENT ADVISOR USE ONLY – NOT FOR REDISTRIBUTION.  THIS VIDEO IS FOR THE PURPOSE OF ILLUSTRATING AN EXAMPLE OF “DEEP VALUE-ADD REDEVELOPMENT”AND IS NOT INTENDED FOR ANY OTHER REASON.

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