Saturday, April 14, 2012

Adaptive Reuse Case Study Project:
Foch Street Properties

I.  Executive Summary: 
A developer in possession of three buildings on Foch Street in Fort Worth seeks advice regarding the highest, best and most profitable use for the properties.  These vintage concrete buildings date to the 1940s.  The project would be an urban infill redevelopment.  The questions that enter into this analysis are numerous, and include the following: 1) What, if anything, should be developed?  2) Are tax credits available, and if so, should they be utilized? 3) Is it prudent to demolish one, or more, buildings to create additional parking? 4) Should development be mothballed? 

 The district surrounding these buildings on Foch Street began booming around 2007.  Foch Street is in the center of Fort Worth's new major regional retail destination: the Cultural District/ West 7th Street Corridor. This is a vibrant, rapidly urbanizing district between Downtown and the Cultural District. Very close to the city's best neighborhoods, TCU, and the University of North Texas medical school. Major mixed use projects surround the Foch Street Warehouses. More than 2,000 new residential condos and apartments have been built in this district in the last few years and 1,000 more units are scheduled for delivery in the next 5 years.

 Cypress Equities' W 7th Project was built immediately west of Foch Street, had leased to approx 12 restaurants, a movie theater, a gym, and some clothing boutiques. The W 7th project was generating significant visitor traffic to the neighborhood and the initial 345 apartments in the project leased up immediately and had awaiting list upon opening.


Evaluation and analysis of the challenges and opportunities these properties provide yield the following recommendations: Maintain Building #1 and lease it up; Demolish Building #2; and Continue current operations for Building #3.
II.  Salient Property Facts:
Subject properties are owned by two separate partnerships and are actually a collection of two different parcels containing 3 buildings at 821-1059 Foch Street, Fort Worth, TX. According to Tarrant County Tax District, Building 1 is situated on 2.82 acres and is its own partnership. Buildings 2 & 3 are situated on 3.53 acres and are held together by the other partnership. Building one is approximately 68K s/f, Building two is approximately 80K s/f, and Building 3 is approximately 14,300 s/f.
III.  Property History and Current Conditions:
Building one was purchased in 2001. Buildings two & three were purchased in 2004. Building one was redeveloped from 2002-2003. Building three was redeveloped from 2004-05 and building two was already 100% leased to an industrial user through 12.31.10 at $2.5 s/f gross on the entire space. As of January 1, 2011, Building two was vacated and empty. The roof required replacement if another tenant were to take the space. Building three was fully leased with one restaurant/bar tenant and seven office tenants. Building one was 60% leased with in place rents of $14.50 NNN. Typical size was 4K s/f with restrooms in the rear of the spaces. Typical dimensions were 27.5x145 s/f demised spaces.
At this point the two partnerships are effectively at break even cash flow. Tenants of buildings three and buildings one are covering their portion of taxes and insurance and their rents are covering the debt service. However, the property taxes on the unoccupied space and building two would require a capital call to fund the balance at year’s end. The partnerships were not interested in funding the delta.
IV.  Analysis:
     The subject property lies within the very popular West 7th area of Fort Worth. New retail and multifamily projects have been developed up and down the 7th street corridor in the last 5 years. MF in the area may be close to the point of saturation with 2,000 new units recently added to the market and another 1,000 planned for the next 5 years. Retail seems to be the highest and best use for the subject property as evidence by the retailers currently leasing the property.

     However, neither building one nor two work for traditional retailers. The buildings are too deep at approximately 180’ in total depth. Existing tenants are only utilizing 145’ of depth leaving 35’ unused at the rear of building one. Further, retail parking at this site is a nightmare. You can’t park building one retail as is. Building two won’t work as retail.

     Further, in order to get building two in a leasable condition, it appears that the partnership would need to replace the roof. The cost of replacing the roof - approx $400K (80K s/f @ $5) would make the project cost prohibitive. It is important to note that the assessed improvement value for each of these two buildings is $1.934MM for building one (valued on income) and $124K for building two (valued on a per lb basis). It’s hard to justify a speculative roof cap-ex project that costs approximately 3x the vacated assessed value of building two. It’s even harder to justify when the parking situation at buildings one and two are placed into the context of the decision.

Roof Ponding Exampls

     Finally please consider the assessed land value of the subject properties. Since 2008 the land on which building two & three are situated has appreciated from $770K to $2MM. Further, in 2008 the improvements were valued at $1.6MM (based on income), but today are again only valued at $124K. It’s clear, with all the new development in the surrounding area, the value is in the land. The current improvements are functionally obsolete. The partnerships need to utilize a land bank strategy that allows them to hold for an additional 36-60months without funding the deal and let the land appreciate closer to the high water mark levels of 2008. How do you get there?
V.  Recomendations:
Recommendation #1: Demolish Building Two And Utilize Area For Parking

     Because of the costs associated with repairing building #2 and the need for additional parking in the general area, we recommend demolishing this building.

Reasoning behind recommendation:
1.  Support building one as retail, there is still some value there. The location is incredible, but the building won’t park well for most retailers. Level building two and utilize the space as parking that supports retail during the day and perhaps generates some income at night by providing a pay lot for the surrounding nightlife.

2.  Lower the property tax basis to save on tax bill.

3.  Avoid the $400K roof expense and any further TI dollars for prospective tenants
Recommendation #2 – Lease up Building One

     Building #1 has solid potential for increase cashflow.  Indeed, in the recent past, this building was nearly fully occupied with paying tenants.  Since the economy has stabilized and this area has been rejuvenated, the time is ripe to find additional tenants.

For Lease real estate Reasoning behind recommendation:
1.  Building one is already 60% leased at $14.50 NNN

2.  Additional parking should help positively impact leasing effort

3.  Sign short term NNN leases and avoid the estimated $5 TI expense with rent abatement

4.  Lease the unutilized space at the back(35’x500’) as storage space

5.  Retail market rents for the area are $13 - $14, this space is irregular, so go below market at $12 and fill the space!

6.  The intent is to have the tenants float your insurance and property taxes – break even while the partnership banks the land

     Building One occupants include the Bikram Yoga Studio, the Greener Good (retailer of sustainable products for the home/ office/ children), Red Productions (film production), La Familia (award-winning local Tex-Mex), Chimy's Cerveceria (popular patio bar/cafe), Bess & Evie's Vintage Clothing.

Ideal prospective tenants would include exceptional quality restaurants and retail shops such as: cafe/coffee bar; gourmet casual restaurants; Spanish restaurant; Thai or other Asian restaurant; active/athletic-oriented retail and apparel; fashion retail (various prices); top quality tailor; and a top quality dry cleaner.
Recommendation #3 – Leave Building Three Alone
     Building #3 is fully leased and performing like a champ!  We recommend maintaining current operational strategy in place for this building.

Reasoning behind recommendation:
1.  Building is 100% occupied; it works

2.  Overall location is great

3.  Location and visibility relative to the rest of the site is terrible, but it works because it parks and rent is cheap (assuming same $14.50 NNN).

4.  Leave it alone!

VI. Conclusion

     The West 7th area has quickly become a European urban village, nestled between downtown, the cultural district and Trinity Park. The city of Fort Worth says it has added millions in property value and sales taxes.  All this momentum bodes well for recently completed developments and for the prospects of development projects scheduled to occur in the foreseeable future.

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