Case Study: Commerce Business Center
Market Opportunity
Magellan purchased this former Kroger distribution facility in 1997 from a local investor who required a quick close. Occupying an excellent location just off the 710 and I-5 freeways, the 12.5 acre property included a 200,000 SF warehouse, a 30,000 SF office building, a 12,000 SF meat-packing plant, a 4,000 SF metal storage shed and an outside storage area. The project, constructed between the 1940's and the early 1960's, suffered from significant deferred maintenance and obsolescence, had old industrial gross leases with collection problems, and had a history of environmental challenges. Given all of the above, the property also presented a significant opportunity for Magellan.
Adding Value
Magellan acquired the property in March 1997 for $5.3 million ($23/SF), closing in just 40 days. Magellan's quick underwriting and short closing schedule allowed it to capitalize on this favorable buying opportunity. The business plan Magellan developed had several key components: (1) assert management control through improved collections and through a conversion of gross leases to net leases; (2) convert non-credit leases to long-term credit leases; (3) adjust the existing rents to market; (4) eliminate the non-industrial uses on the property; and, (5) utilize the excess land.
Between 1997 and 2002, the existing buildings were cosmetically refurbished, the leases were converted and the redevelopment plan was established. In 2001, Magellan recapitalized the asset for $8.5 million and initiated the redevelopment. The project involved replacing the three smaller buildings (totaling 46,000 SF) with 91,000 SF of 24' clear multi-tenant incubator spaces ranging in size from 5,800-18,000 SF. The remaining 200,000 SF warehouse was seismically retrofitted. A fenced concrete yard and upgraded electrical system were also installed along with new landscaping. Magellan successfully negotiated financial assistance from the Redevelopment Agency of the City of Commerce to help fund several of the improvements.
Results
The construction is now complete and the buildings are 100% leased. The redevelopment increased the property's density from 246,000 SF to 291,000 SF and increased the NOI from approximately $800,000 at the time of recapitalization to $1.4 million at stabilization. The asset's value has appreciated considerably since the time of purchase and is projected to generate a 3.6x multiple on the investors' original equity if sold today. The success of this venture reflects Magellan's ability to quickly capitalize on a favorable buying opportunity, and apply its management, development and leasing expertise to extract the maximum value from an asset.