I know what you’re thinking…26 years doesn’t exactly qualify as a property “flip”, but sometimes it takes time to achieve the kind of real estate investing (REI) that makes our investors flip out – in a good way!
That’s what happened this month when we sold the Center Building in Jacksonville, Florida for $9.9 million dollars. The 3-story, 100,000 SF LEED Certified office building is located on the edge of a beautiful lake in the prestigious Deerwood Office Park. It is a jewel, with its inviting landscaped interior courtyard and stunning views of the lake.
It wasn’t that way when the original property owners defaulted on the building in 1994 and it was taken over by California Savings and Loan. In fact, it was a mess! Defaulted properties are usually in shambles, and this one was quite a piece of work, both in its lapsed building maintenance and financial records.
This is a story of what teamwork can successfully accomplish at the Allen Morris Company through our combined and diverse expertise in Property Management & Leasing, Sales, Development & Construction, Engineering, Finance & Accounting, Marketing & Asset Management.
The S&L who foreclosed hired the Allen Morris Company’s Property Management department to clean up and stabilize what was at that time called the Center Building. It then hired our Sales & Leasing department to package and offer the building for sale. Our team found a buyer who entered a purchase contract; however, before the closing, the buyer defaulted. A new buyer was soon found, and a new purchase contract executed.
During this process, our internal financial analysts modeled the projected cashflows, costs of renovation, code compliance, deferred maintenance, management, leasing & marketing costs, and modeled scenarios for a probable return on investment.
The building was going for $1.9 million – a price our financial analysts saw as a great opportunity for our investors and in turn made us ask if we could submit a backup offer with the same price and terms, in the event that the new buyer also defaulted. Since the price had been established, there was no conflict of interest and our backup offer provided a guaranteed closing. The S&L agreed, and luck would have it that the new buyer defaulted.
Our due diligence uncovered many issues, including the existence of asbestos throughout the property. After working through the situation with the S&L, we closed the property within two weeks. The asbestos was safely removed by working evenings and weekends with strict environmental controls in place.
Some of the other problems we resolved:
- The air conditioning system in the building was poorly designed and installed, requiring the replacement of most of the air-conditioning units and controls.
- Window tinting film was applied to lower the heat load and improve the energy efficiency of the whole building.
- Our building engineers implemented LEED Certification Program and achieved the first privately owned LEED Certified office building in North Florida.
- Handicap bathrooms and access were required to bring the building up to code.
- We installed a new gazebo with a sculpture fountain in the central courtyard along with new landscaping, interior artwork, and fresh paint throughout to give it a fresh appearance and create a great experience for the tenants and their employees while also making it competitive in the local leasing market.
Our Property Management team coordinated all activities and greatly elevated the management operations, as well as leasing and overall tenant experience to a professional level. The Accounting department set everything in order, clarifying the rent billings and payment dates. In fact, they discovered that tenant escalation charges had not been billed for several tenants. The team quickly corrected this, creating significant value.
Over the years, we have monitored the Center Building’s high performance in the market looking for the right moment to sell. Recently, our financial analysis and market research convinced us that the current cash flow and projected office leasing market was at a high point for the foreseeable future. In other words, it was time to reintroduce the building back on the market as the “new” Center Building. Our Sales and Marketing teams crafted a marketing strategy and materials including a new logo, photographs, promotion of the LEED Certification, press releases, web page, tenant broker receptions, and unique leasing incentives.
The final sale at $9.9 million was not a sure thing, as we had a challenging market with little leasing activity, and we unexpectedly lost a major tenant for one-third of the building in a very slow market. We committed the necessary capital to carry the negative cashflows through the depressed office leasing market. We were patient and ready when the market rebounded. Ultimately, we filled the vacancy with solid credit tenants and stabilized the building with a strong cash flow, justifying a high market value.
The investment provided a long term cashflow for the investors, a nice profit on the exit, and a great example of teamwork!