Case Study: Commerce Business Center
Acquisition
In 1997, Magellan was approached by a local industrial broker representing a private owner interested in selling its 250,000 SF mixed-use industrial asset in the City of Commerce, California.
The property, well located and fully leased in a core Southern California industrial market, was the former headquarters for Market Basket and consisted of a rail served, 200,000 SF, 1947 vintage warehouse facility, an approximately 25,000 SF office building and a 12,000 SF industrial building used as a “deboning” operation for residue from the local Vernon slaughtering facilities. The property also had the remnants of an environmental history that needed to be addressed, lingering seismic issues and significant deferred capex.
Market Opportunity
The circumstances were favorable for an attractive purchase price. The off market nature of the negotiation combined with the site-specific challenges yielded an attractive opportunity.
In addition, Magellan’s environmental, redevelopment, entitlement and leasing expertise proved essential in addressing the environmental challenges, consolidating the uses to industrial and bringing the property up closer to institutional standards.
Value Creation
Once the environmental and seismic issues were addressed, Magellan focused its attention on replacing the office and “deboning” uses with more compatible industrial facilities. The decision was to build 90,000 SF of class A, dock high industrial targeting the smaller tenants in the marketplace. Magellan correctly identified this as a significantly underserved niche. The two building project was completed in 2006 and quickly reached 100% occupancy
Concurrently, Magellan had negotiated the purchase of another local industrial building that had self storage conversion potential. Magellan consolidated these two opportunities with one partnership, and one lender (please reference the self storage section for the Magellan Storage – Commerce case study).
Both projects were progressing exceedingly well, until around 2008. While Commerce Business Center remained substantially full, the lease with Magellan’s anchor tenant (150,000 SF) at the property came up for renewal at around this time.
Although Magellan was able to retain the tenant, the rent dropped by over 50%. In addition, although the Magellan Storage facility was completed and was enjoying a very successful initial leaseup, the leasing velocity virtually dried up in 2009.
The ensuing conversations with Magellan’s partners and lender were prolonged and challenging but ultimately successful. All of the Magellan partners contributed additional capital and the lender adjusted the interest rate and prolonged the maturity date (until January 2018) to give the project a chance. Although the project remained "underwater" for the better part of the ensuing six years or so, the Magellan team was grateful for its partners’ and lender's patience and support.
With improvements in the industrial (and self storage) markets, Magellan initiated the remaining components of its value creation plan. The goal of the plan was to both make the project appealing to institutional investors while also creating other value-added opportunities for selected private investors.
Magellan first planned and implemented a series of functional and cosmetic enhancements including building a guard shack, installing a security camera system, bringing fiber optics to the property, enhancing the dated electrical and sprinkler systems in the 200,000 SF building, evaluating roof replacement alternatives for the 1947 vintage building, augmenting the project’s branding with a new signage system, repainting the project and freshening the project landscaping.
Second, Magellan approached the City of Commerce about the possibility of having a condominium map approved for the project to open up the possibility of selling individual units to the project’s tenants. Although the city had never done a condominium map before, by utilizing its long-standing relationship with the city and experience with entitlements, Magellan was able to successfully complete the initial steps in this process with the city’s approval.
Finally, key to unlocking the full value of the project was bringing all the leases up to market, especially the 150,000 SF lease with its anchor tenant. Capitalizing on its long-term relationship with this tenant, Magellan ultimately succeeded in signing a new five year lease with an approximately 300% increase in the NNN rent.
Results
In January 2018, Magellan, its partners and lender enjoyed an exceptionally satisfactory outcome when it sold Commerce Business Center to the CORE + Fund of the Blackstone Group (please see the attached press releases for additional detail). The proceeds from the sale were reinvested as part of a 1031 exchange in a 275-unit, Class A multifamily property in Denver, CO. Click Here to view a description of that transaction.