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.
The Business Plan elements were “classic” value-added items as follows:
- The Project needed significant exterior cosmetic upgrades, including signage, landscaping, parking lot, and a new paint scheme.
- The previous ownerships had prioritized cash flow and over occupancy and increasing rental rates, so in-place leases were well below current market levels.
- The interior office and warehouse specifications were very “dated” and needed substantial renovations to meet today’s tenant requirements.
- The prior ownership was very unresponsive to leasing activity and was unwilling to provide suite upgrades, thus occupancy was much lower than the competitive set at only 79% at acquisition.
The basic metrics of the deal were: 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 had 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. 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 with over 100 yards of direct freeway frontage. Additionally, its prime location provides a home for a diversity of tenants, which require small suite sizes and ease of access for small businesses., particularly since it is situated just minutes north of Buckhead, the highest demographic area in Atlanta.
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. As mentioned above, the Project was approximately 79% occupied at acquisition (with nine vacancies totaling about 53,000 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 forecasted leasing the nine 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. All of this scope of work has been completed as of August 2020 and occupancy has increased to approximately 92%, well ahead of schedule in the Business Plan, with only three units remaining to “backfill”.
As described in the bullet points above, included in the Business Plan’s $1,200,000 capital expenditures budget are reserves for roof improvements and replacement in addition to proceeds for vacant unit preparations (“VUP”), and for other cosmetic upgrades to the Project. These improvements are a critical component of the Business Plan and will enhance appearance and functionality of the Project through the increases 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.