Seeking Advice/Suggestions on what to do with CRE property
Hey CRE Community,  


Wanted some advice on what to do with a property my family owns.  


The building is about 15,000 square feet divided evenly between the ground floor and basement level on a one acre lot. The property is on a corner lot with a four-way signalized intersection. The property was previously occupied by a former major bank with two drive-thru lanes in a city where it is near impossible to build new drive-thrus and is grandfather in.  


We could sell the property as is for a few multiples of the initial investment and then exchange into other properties. The value is in the dirt and grandfathered drive-thru.  


If we lease it up to a national retailer, which is well within the realm of possibility given the previous tenant being a former major bank, we could then sell it for double the “sell as is" scenario above with a brand new long term lease in place.  


How do people usually find the National tenants? Should we hire a landlord rep broker or just advertise it for lease ourselves on loopnet and put up for lease signs? What do the negotiations typically look like (eg: TIs and other rent concessions)?   


The site is also suitable for redevelopment for a project that can be up to 60’ tall. We were thinking of a few scenarios: a strip mall with some national anchor tenant(s), storage units on top and ground floor retail, or apartments on top with ground floor retail.  


We would probably do this in a JV situation since we are not developers or would explore this if we can pre-lease the major components before spending a small fortune on the soft-costs of pre-development.  


Greatly appreciate everyone's feedback in advance.
[{"id": "hl22vve", "text": "Exciting opportunity you have. My 2 cents, assuming your assumptions are all correct and that this is a high traffic, desirable location...Hire a good, experienced NNN broker to help you through the process of lease-up to a strong national tenant and then sell.", "replies": [{"id": "hl3b1p7", "text": "Thank you for the advice. This is probably what we are leaning towards, as waiting to get one of the national's in would be the ideal situation for immediate resale value or just long term stability should we decide to keep the property and pull funds out once it is stabilized.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hl2dxzf", "text": "In my opinion this depends on a few different items. \nIf you\u2019re not well capitalized, sell as-is. \nIf you are well capitalized and can afford to pay 6% (estimate) in leasing commissions and market tenant allowance, then hire the best retail broker in town and let them loose. \nLast scenario. Dependent on the property and future development rights after leasing it, I would explore using your newly leased (by this point) property\u2019s higher valuation to then help bring in a JV partner (at the higher valuation)  to build more leasable area. This way you take chips off the table and also create additional value.", "replies": [{"id": "hl3bwwu", "text": "Thank you for the detailed feedback. There are a few properties in the market we are interested in, but are not in a terrible rush to just sell this one and move on. We are able to hire one of the more active brokers that represent multiple brands or at least have some connections with people within those retailers. \n\nDoes one typically add on the cost of the commission and TIAs into the final rental rate or is that just costs that need to be absorbed for acquiring the tenant? \n\nThe JV situation seems the most complex, so for all the extra hassles, I would hope it would be at least decently better returns vs. selling with a leased national tenant. Can you provide any insights from your experience or knowledge of how these two scenarios usually compare?", "replies": [{"id": "hl3z0vt", "text": "The way we generally look at it is through a \u201cnet effective rent\u201d calculation, but for sake of time I won\u2019t get into that. The easiest way to look at it is by determining the payback period of your TI/LC investment. If you pay $50/SF in TI/LC and rent (not including expense reimbursement) is $25/SF you have a two year payback. Your broker should also guide you to what market TIs are, but just keep in mind a broker is incentivized to get a deal done. \n\nYou\u2019re correct, brining a partner in is more  complicated. The way it will work a lot of the times is that you will bring in someone with development expertise, who would put in minimal capital, but have the incentive of a promote. The promote level would be a negotiation so you could set it to make sure your returns were high enough to justify the headache. \n\nDoes this help?", "replies": [{"id": "hl5q2f6", "text": "Your explanation makes sense. I've heard different things when it comes to TIs like some LL's amortize the costs of TIs on top of the base rent amount kind've like a loan with no interest or some lower interest rate to recapture that TI costs. Leasing commissions I've also heard similar things about too and would apply just like the amortization of TI costs situation. \n\n&amp;#x200B;\n\nGreat advice again for the JV situation. If I remember correctly, I think the tiered return system (waterfall?)  based on performance targets is almost like a CEO's stock compensation based on stock price levels. Do the profit splits go something along the lines of 80/20, 70/30, 50/50, etc. in favor of the land owner and then starts reversing the numbers but in the JV's partner's favor once the project has hit its next tier of returns?", "replies": [], "depth": 4}, {"id": "hl5vxb5", "text": "You definitely can amortize, but sometimes it is tough to get the tenant to buy into that methodology. \n\nIf you sold 10% to a GP who was going to do the development, here is my scenario: Usually you\u2019d pick some metric like 8% IRR and then say 80/20 (you get 80, they get 20) over the 8%. They double their share over that hurdle rate. But, essentially you\u2019re correct that it works the way you described CEO compensation.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hl34czm", "text": "I hate to say this, but on the \u201clease to national retailer scenario\u201d just making sure you understand this isn\u2019t a 15,000 sf building split between street level and basement. It\u2019s a 7,500 square foot building. Which would then need to be remodeled, split, TI\u2019s, etc. Also the value in the grandfathered drive-thru may go away if the value is also in the underlying land. \n\nIf you have the cash to stay in and JV that might be the play provided you vet and trust the JV partner and can keep a reasonable amount of control, but the wrong partner or timing on a new development can always make it go bad. \n\nI\u2019d put it out \u201cfor sale or lease\u201d with the most active retail CRE broker in your area and pick a price that would work for you and your family in either case. If the location is that good, the JV offers could be proposed by you when responding to an offer, or if the offer itself is good enough to move on to another project, you move on", "replies": [{"id": "hl3d2j8", "text": "Thank you for your insight and I promise I don't shoot the messenger xD! How you explained this regarding the ground floor and basement levels is spot on. The overall costs to get the place ready for the end user is up in the air, as we aren't sure how that all will be negotiated. Are you able to provide some examples on how you see this scenario playing out? \n\nAs far as the value in the grandfathered drive-thru, it's our understanding from the zoning code that if someone were to redevelop the site for let's say a Burger King, they are able to tear down the existing building and can still build the new structure to include a drive-thru, so it is not necessary for them to preserve the existing building. \n\nAbsolutely agree with your thoughts on the JV route. We would want the JV partner to contribute some meaningful capital to ensure they have skin in the game. I like the idea of for a lack of a better phrase \"bait and switching\" with responding to potential offers suggesting a JV depending on who the buyer is and their plans for the site. Is there a better way to ask about JV's with prospective buyers or is it pretty straight forward in that you just ask the other person if they're interested?", "replies": [], "depth": 2}], "depth": 1}, {"id": "hl3b48e", "text": "You got good advice that\u2019s all pretty much on the same page. Sell as-is if you don\u2019t have the money; otherwise, pay the TI/LC for a good NNN tenant.\n\nComing from the developer angle though, I\u2019m not really sure that it makes sense to lease it up and then try to develop it. Assume you lease it up to a NNN tenant then shop it around. If you take a year to market to developers and go under contract/DD, then allow 2-3 years for approvals, where are you at with your lease? Most developers are going to want to break ground ASAP to get the project vertical, but you\u2019ll probably have at least 1-2 years left on a 5 yr lease. And if you have high TIs, you might be looking at a 10 year base term instead.  Or if your tenant is footing the bill, they\u2019ll want options to extend after the base term.  I could be misunderstanding the layout and future development potential, but I\u2019m thinking the future building goes vertical in the existing footprint. \n\nI think you need to do an analysis upfront and compare/contrast the value of a drive through vs increasing 5x the leasable space. If you decide to develop, offer a very short term office space lease to someone or another bank and 75% of market rate on a shorter term.", "replies": [{"id": "hl3f7qy", "text": "Thank you for providing this thorough feedback. \n\nI absolutely agree with everyone regarding the finding a national tenant scenario given its significant upside.\n\nThe thought process of doing a complete redevelopment and going full vertical is we would like to pre-lease the ground floor retail units that would provide some cash flow and serve as an amenity, while the rest of the building is constructed whether it be apartments, storage units, or office (not as likely I think given the current environment).\n\nIt would be nice if we could still have a drive-thru retail unit at the bottom of the new vertical development like a Starbucks, but not sure on the likelihood of that one xD! \n\nYour suggestion regarding doing an analysis of how much we should value this drive through vs. increasing the overall square footage by going vertical is super helpful as it never really crossed our minds how the numbers would play out in that scenario, though we don't know where to really begin with the vertical redevelopment numbers as it's not our wheelhouse.", "replies": [{"id": "hl4es10", "text": "Not quite sure if I\u2019m following correctly\u2026 are you suggesting that you\u2019re going to build floors on top of your existing building?", "replies": [{"id": "hl5odpg", "text": "What I was trying to convey was in a full redevelopment scenario where we tear down the existing structure, we would want the new building's ground floor to have retail units and the upper floors will be either multi-family units or storage units. The ground floor retail could be pre-leased while and can open up shop while the upper stories are still under construction. Hope that clarifies things a bit.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hl46vfc", "text": "Is it still occupied? Are you sure it\u2019s grandfathered because in the US you\u2019ll probably lose it once it goes vacant.", "replies": [], "depth": 1}, {"id": "hl58g0o", "text": "You need to get a VTS account, and see what 15K SF stand alone buildings are trading for. \n\nWhat is your zoning? Are you tied into politics? How easy could you rezone this land/building? \n\nThere are lots of users looking for that footprint, but zoning and parking will be your biggest issues. The parking for a bank versus a retail or medical use are different. \n\nHave you met with an architect to get a price to demise the electrical/mechanical? Small users are easier to attract. \n\nStarbucks loves a stand-alone where they can create the ingress/egress, then the balance of the building could be used for service orientated uses. But again, Starbucks is a National credited TT, easy money and if the world shuts down they have a drive-thru so they can continue to make money.", "replies": [], "depth": 1}]