Real Estate Investment Repositioning

Real Estate Investment Repositioning

Case Study

Real Estate Investment

REPOSITIONING

Building information:

  • Address: 140 – 160 Franklin Street, Oakland, CA 94612
  • Square Feet: +/- 55,000
  • Tenants: Multi-Tenant

Terms:

  • Type: Real Estate Investment Repositioning
  • Owner: Equistone Partners in partnership with Hamilton Zanze

THE SETTING

Back in November of 2007, life was good and it seemed that nothing would stop the economic boom. Equistone Partners was just formed in California and we were eager to find a project in an up-and-coming area with a path to raise limited partner equity and acquire an asset. We found the perfect choice in a well-located property in Oakland’s Jack London Square neighborhood, adjacent to the inner harbor.

The property is one block from a large Class A office complex on the waterfront, where an institutional equity partner committed a significant investment in the area. Jack London Square is an alternative to downtown Oakland, where architects, engineers, law firms and sole practitioners would gather to grab coffee or lunch in an atmosphere away from the direct hustle and bustle of downtown. The location is idyllic with clean and clear ocean breezes; the perfect setting for a successful venture.

THE BUILDING HISTORY

140-160 Franklin St. was redeveloped in the 1980s by adding a new three-story professional office building to a site that included a one-story warehouse along with a brick and timber three level building constructed in the 1930s. The brick and natural wood 1930s structure on the corner was full of character. The adjacent 1980s structure was joined by a two-story wood frame addition over a one-story warehouse building. It was clear the redevelopment in the 1980s was well-executed by its owner, a renowned architect. The property was operated by a family office and overseen by a local third-party manager.

THE OPPORTUNITY

When the original owner/architect passed away, the family office continued to lease the property and did its best to remain competitive in the marketplace. Honestly, the building was trapped in the ‘80s and the family was not able to keep the property up-to-date. They were resistant to change predominately due to the legacy of the family’s patriarch, who designed the building. The property declined over the years and fell out of touch in comparison to other freshly designed properties in the area. When the family decided to put the property on the market, the real estate community didn’t embrace the opportunity. Unfortunately for the ownership, it was not widely marketed on national multiple listing services.

THE STRATEGY

Equistone Partners saw a great piece of real estate that was challenged by ineffective marketing and acquired the property at a price well below replacement cost. Our strategy was to place the property in contract and raise limited partner equity, inclusive of all capital required to reposition the asset.

The final business plan was formulated and Equistone Partners acquired the property. First on the list was to reposition the well-located real estate asset in the market, coupled with a plan to drive economic value through strategic investment and capital expenditure. As we geared up for our original plan in 2008, the bottom fell out of the market, demand waned and supply increased. Failure was not an option for Equistone Partners, but the business climate was extraordinarily dire.

Due to the economic collapse in 2008, return on capital was a term of the past. Survival was key and a return of capital was targeted. Equistone Partners created a new strategy to ensure its investors not only preserved their capital but provided a path to a return on their investment.

THE PROCESS

Equistone Partners surveyed every competitor in the marketplace and noticed that smaller single offices catering to sole practitioners and small firms were limited, while large blocks of space were sitting on the market. Environmentally friendly “Green” buildings were at home in the neighboring city of San Francisco, but chiefly limited to expensive Class A properties.

The business plan considered the new economic reality of a global recession. What if we pursued our original strategy, but amplified it by adhering to the leadership for Energy, Efficiency and Design (LEED) standards, so that the property could differentiate itself from the pack as a “Green” building? An idea was born. As we improved and updated the building, the larger spaces were divided into easily expandable smaller office units. Rather than wait for tenants to provide improvements through an allowance, the suites were spec built up front to provide ease of occupancy and cost control. The spaces were move in ready with high speed fiberoptic connectivity in every suite. A common conference room and kitchen was built to serve these “micro suites,” as a community was formed around green construction and like-minded companies that desired a clean and innovative work environment.

THE RESULT

140 – 160 Franklin St. remained 93% occupied through the economic downturn of 2008. When global liquidity tightened and financing was scarce, the project delivered not only a return of investment capital, but a return on capital at a time when many buildings were running at only 50% occupancy with negative cash flow. The property was bought prior to a recession and was sold post-recession, returning initial equity back to investors plus a return on capital, a rare and respected feat in that economic environment.

Great real estate that is well located can be impacted by outside factors, like the circumstances that affected the prior owner’s family after he passed away. They did not want to make changes to improve the property for fear of affecting their late father’s legacy. Real estate can also be severely jolted by external factors like the economy. Equistone Partners recognized the signs and revised the original strategy to remain effective in a changing market.

Distressed Real Estate Investment Acquisition

Distressed Real Estate Investment Acquisition

Case Study

Distressed Real Estate Investment Acquisition

Building information:

  • Address: 80 Swan Way, Oakland, CA 94612
  • Square Feet: +/- 50,000
  • Tenants: Multi-Tenant

Terms:

  • Type: Distressed Real Estate Acquisition of a Mid-Rise Suburban Class B Office Building
  • Owner: Equistone Partners in partnership with Hamilton Zanze

THE SETTING

80 Swan Way in Oakland, California is an example of that coveted acquisition in the real estate cycle where a property is acquired for a fraction of replacement cost, due to external economic factors.

Back in 2009, when the financial cycle bottomed out, many buildings were in default on their loans. A 1980s office building at 70% vacancy in the Oakland airport market went to auction on the courthouse steps along with a variety of residential homes. Thankfully our competitors on hand were looking to acquire homes, not an office building.

Equistone Partners focused its sites on the 50,000 square foot office building. We were familiar with the market and had a strong plan of attack to lease up the vacant space and reposition the asset in the market.

THE BUILDING HISTORY

80 Swan Way was formerly occupied by Southwest Airlines and the highly desirable top floor was occupied by a regional accounting firm. Historically the neighboring areas of the building, located close to the Oakland Airport, experienced spill over demand from downtown Oakland. Southwest Airlines downsized in the area and left a large vacancy due to the economic downturn. The Oakland Airport market was experiencing a reverse migration back to the central business district. A flight to higher quality buildings began to take its toll on the area.

THE OPPORTUNITY

Equistone Partners forged a relationship with the main principals of the accounting firm located at 80 Sway Way, prior to it going to auction. Representation was secured to assist with the evaluation of a lease renewal or relocation within the building regardless of the auction’s outcome. An offer to acquire the property with the accounting firm in partnership was offered and considered as an option. The firm was disappointed with the former ownership’s lack of attention to the structure. The building owner defaulted on the loan, which lead to receivership and the eventual sale of the property. The firm’s lease would expire in four years, further impacting any future owner of the real estate.

THE STRATEGY

A capital improvement and marketing strategy was developed to update the building’s infrastructure and to find tenants that sourced employees from areas in the southern I-880 corridor. 80 Swan Way was surrounded by a sea of parking, close to major transportation arteries and two miles from Oakland International Airport, a perfect match for these companies.

THE PROCESS

The Equistone Partners principals, along with an affiliate equity partner, purchased the asset on the courthouse steps at a price of one quarter the cost of construction. We secured a technology company for the entire 2nd floor looking for exceptional office space and abundant parking for their employees and close proximity from the south I-880 corridor. Equistone Partners deployed an effective marketing strategy with the right product and amenities to attract established businesses to the asset. The largest conference room in the building was repurposed as a common amenity and a failed café was turned into a state-of-the-art gym. High speed wireless fiber was installed to provide the best connectivity for tech-driven companies. We updated the landscaping and added new lights to the parking lot, which was also cleaned and re-surfaced.

THE RESULT

Equistone Partners completed multiple leases and stabilized the asset. The capital improvements, common conference room, gym and new tenancy breathed new life into the building. The accounting firm that occupied the top floor decided to move downtown at the end of their lease, which ended up being a fortuitous move for all. By that point we had secured leases for the remainder of the building, easing the impact to vacancy.

The newly renovated building was illustrious and the preeminent floor with outstanding views was now available for lease. The timing was right and the building was marketed for sale to target owner-users who wanted a high-profile top floor space, with other tenancy on lower floors allowing for expansion as leases expired. Owner-users with the intent of occupying 51% of the building typically are able to obtain SBA loans from the government at higher leverage.

A local company was in the market for an updated and partially leased building with space for its own occupancy. We delivered a deal that was a homerun for the new owner and achieved a return four times the initial capital invested for Equistone Partner’s investors, a win-win.