In October 2019, CIP Real Estate acquired Brook Hollow Center (“the Project) from TPG Capital, in its new investment program with Almanac Realty Investors. The Project is a 252,698 square foot, five-building, multi-tenant business park in Norcross, Georgia, located adjacent to the I-85 Freeway, off of the Indian Trail Lilburn Road exit. The Project is situated about 25 minutes north from Downtown Atlanta and 30 minutes from Hartsfield-Jackson Atlanta International Airport.
CIP purchased the Project on an off-market basis for $19.0 million ($75.19 per s.f.) with a $60,000 credit being provided by the seller for parking lot improvement expenses. The total cost basis at the conclusion of the seven-year business plan is estimated to be $20.59 million ($81.48 per sf), which includes closing costs, capital expenditures, and reserves for roof improvements along with anticipated vacant unit make-ready costs incurred during the ownership period. Due to lack of available industrial-zoned land in the greater Atlanta area and very high construction costs, the replacement cost for the Project is estimated to be approximately $192 per square foot (with the land value alone, factored on building area, exceeding $54 per s.f.). Thus, the Project’s “going in” and “exit” cost basis was substantially below replacement cost.
The seller recently purchased the Project in early 2019 as a part of a $48 million portfolio (of which CIP was a bidder), though the Project specifically did not fit its overall investment profile. The seller, therefore, was motivated to split this park from the portfolio on a “breakeven” basis. The prior owner was the original owner/ developer of the Project and maintained a management strategy of high occupancy, but low rental rates with low leasing costs. Correspondingly, the original owner did not implement needed capital improvements in recent years or invest in specific tenant build-outs to achieve higher rental rates, both of which are included in CIP’s management strategy.
Built in phases from 1979 – 1985, the Project was designed to offer functionality and accessibility for industrial and flex tenants. The Project’s location in Norcross (just north of Doraville and Buckhead) places it in one of the most sought-after industrial markets in the city due to strong demographics and workforce, and an irreplaceable location directly off the I-85 Freeway. The Project also benefits from a close proximity to the DeKalb-Peachtree Airport, which offers direct flights to and from Charlotte and will allow the Project to be managed by CIP’s East Coast team. Additionally, its prime location provides a home for a diversity of tenants, which require small suite sizes and ease of access for small businesses.
The Project comprises thirty-six (36) industrial/office/flex units averaging 28.3% office build-out and ranging in size from 4,864 s.f. to 14,941 s.f., with the majority of suites between 5,000 s.f. and 10,000 s.f. The Project is approximately 83% occupied (with eight vacancies totaling about 43,164 s.f.) and includes multiple leases that have effective rental rates averaging 15-20% below current market levels. Nearly all of the leases expire within the five-year business plan, providing an excellent opportunity to roll rental rates to higher market levels and create staggered future lease expirations for sale benefit purposes. The resulting “value-add” plan comprises leasing the eight vacant suites in the first year of the hold period (significant reserves are included in our acquisition model for this requirement), restructuring and extending existing tenant leases, upgrading interior suites to a higher industrial finish to improve resale value, and completing modest exterior and cosmetic upgrades.
Included in the Business Plan’s $1,200,000 capital expenditures budget are reserves for roof improvements and replacements, vacant unit preparations (“VUP”), and for other cosmetic upgrades to the Project, including landscaping and signage improvements, painting, parking lot, and contingency. These improvements will enhance appearance and functionality of the Project and increase appeal to current and prospective tenants. As stated above, in addition to these capital items, the Project will have reserves for future tenant improvement costs and leasing commissions over the seven-year business plan.
This investment provides an excellent opportunity to acquire a freeway frontage, multi-tenant flex/industrial park in a rapidly-growing and gentrifying market at a significant discount to replacement value while providing excellent annual cash flow and appreciation in value.