Case Study: Valencia Business Center
Market Opportunity
In August 2001, Magellan agreed to acquire a 260,000 SF industrial building in Fullerton, California for $12.2 million leased at the time for 3 years to Weber Aircraft/Mag Aerospace. The opportunity was to convert the building into a multi-tenant facility after the tenant's planned departure. During escrow, Magellan discovered an environmental issue and insisted upon further testing. When the seller refused, Magellan cancelled the escrow. The seller subsequently discovered that the environmental issues were legitimate and proceeded with a two year testing and clean up program. After the seller unsuccessfully sought to sell the asset at a comparable price to other investors, they once again approached Magellan.
Adding Value
Magellan put the property back under contract in August, 2003 for $10 million. The purchase price was contingent upon the receipt of a “No Further Action” (NFA) letter from the Regional Water Quality Control Board (RWQCB) affirming that the property did not require further testing or clean up. During this second escrow, the receipt of the NFA was delayed and appeared uncertain. Magellan cancelled the escrow for a second time but also became aware that the seller faced considerable pressure to sell the property before the end of the year. After a careful re-examination of the environmental records, Magellan concluded that the receipt of the NFA was in fact probable. Magellan subsequently agreed to a two week close without the NFA in exchange for a reduction in the purchase price to $8 million. Magellan closed on the property in December 2004. The NFA was received shortly before the close.
Given the imminent departure of the tenant and the favorable basis of the property, Magellan reassessed its business plan. After consulting with several brokerage teams, reviewing the site with its architect, and assessing the receptivity of the City of Fullerton for a zoning change, Magellan concluded that the highest and best use for the property was to redevelop the site into small industrial condominiums-for-sale.
Results
During the pre-development process, Magellan was able to lease the building on a short-term basis while seeking entitlements. Magellan received unanimous approval for their plans from the City of Fullerton in December 2005. Those plans call for the construction of 25 industrial condominiums ranging in size from 6,000 SF to 13,000 SF designed to appeal to the numerous small business owners in Southern California wishing to own their own office/distribution facilities. Project features include an attractive 2:1,000 SF parking ratio, secured yards, and a high-image architectural design. The working drawings have since been completed, new construction financing has been obtained, and the construction and marketing processes have commenced.
Upon completion, the “Valencia Business Center” is projected to generate a gross profit of greater than $9 million for the investors on an initial equity investment of $3.1 million. To date, the project has been a good example of Magellan's environmental experience, negotiating expertise, market understanding and sound judgment in taking carefully calculated risks on behalf of its investors.