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More than a renovation: the reconfiguration of a shopping center.

More than a Renovation: The Reconfiguration of a Shopping Center

Renovating an aging shopping center as a way of helping it compete more effectively is certainly nothing new. But when the renovation involves extensive new construction that fundamentally changes the configuration of the center and adds an extra 37,300 square feet of space the center's leasable area, the story takes on a new interest. Yet, to make this extensive renovation profitable, the center required careful planning and analysis of the market potential of the area.

On the surface, Cherry Knolls Shopping Center shared the problems of many similar aging neighborhood centers. Nearly 15 years of operation had left the buildings shabby and and dated looking. Dark wood trim sapped the center of vitality, while a nonexistent signage code had permitted tenants to create a hodgepodge of colors and sizes of signs. The parking areas and landscaping were also in poor shape.

Compounding the physical problems was the unusual configuration of the 98,000-square-foot center (Figure 1). The center was split in two by an easement owned by Bank Western, which also owned the pad on which its building was located. Because of the space between the two sections of the center, shoppers drove from one area to another, losing much of the benefit of the Safeway and Osco Drug anchors for the other stores. The small section of the property cut off by Easter Avenue was difficult to access and did not seem part of the center as a whole.

The renovation of a major regional center across the street and construction of a new center two miles away added to the center's competition.

The weak tenant mix of the property mirrored its poor physical condition. With the exception of the a few major tenants, the center's mix consisted of "Mom and Pop" operations, who were attracted to the center because of its low rents. Even relatively successful operations, such as Jim Dandy's fast food, were finding that their level of profit was falling as the demographics of the neighborhood shifted.

Yet, despite initial drawbacks, the center had a tremendous potential for enhanced value due to the location. The center was located directly across South University Boulevard from the Southglenn Mall, perhaps the most successful mall in the area. An estimated 51,000 cars a day passed the center along either University or Arapahoe. Market studies of the area revealed that the 89,000 residents within a three-mile radius of the center had average incomes of $48,000 annually. The tremendous amount of space leased at below-market rents also offered the possibility of improved value.

With the many positives, Landon Investments, which acquired the center in 1985, felt that Cherry Knolls could easily be converted to a high-level property. In the long run, they proved to be correct; but over the short-term, the conversion was much more difficult than they had anticipated.

Phase one:

Lease renegotiation

The first step in the renovation process was to renegotiate or buy out existing leases in order to permit reconfiguration of the site and moving up of retail space to above-market rents. Several tenants were approached.

The twin-screen Commonwealth Theater occupied 6,820 square feet in Building A, which it held on a lease until 1999 at a flat, under-market rate of $4.00 per square foot. The space had tremendous potential for added value if brought up to full market rents. After 9 months of negotiation, the lease was acquired for $75,000, allowing the space to be divided and leased for an average of $14.65 per square foot. The original operators of the theater had subleased space to poor operators who were losing money. The original lessees wanted out, and the deal became viable when they accepted the $75,000 offer.

The lease with the freestanding Jim Dandy Fried Chicken outlet on the northeast corner of the property also provided opportunities for expanded leasable space. The lease had only two years left to run, but was bought out to protect against the possibility of tenants exercising their renewal option.

The lease for the 5,900-square-foot buildings with rents of $20,500 annually was bought out for $55,000. A decision was made to tear down the building and construct an additional 10,250 square feet of space for approximately $650,000. The resulting Arapahoe strip shops were leased up at annual rents of $158,200.

A more complex buyout focused on the Bank Western pad that bisected the center. Successfully acquiring the easement that separated the two retail blocks was vital if the center was going to be joined by the 60-foot, 10,000-square-foot connecting link that would give it one identity. Over six months, concurrent negotiations were carried on with Bank Western and Arby's, which occupied the small part of the center south of Easter Avenue.

Bank Western was interested in moving its facility to the southern space in order to have room to add drive through windows, which its current configuration inside the center made difficult. At the same time, the bank did not want to move far from its established base of depositors. The bank was willing to sell its building if we were able to locate another facility in the area that met its needs. After four months of looking for alternative spaces, the property occupied by Arby's seemed best suited to the bank's needs. So began six months of negotiation to relocate the food chain store.

The negotiations ended with Arby's moving from the center and Bank Western swapping the land and building within the center for the Easter Avenue corner at a cost of $500,000. The Bank Western building was demolished, and the pad made available for subsequent construction. This transaction allowed for an increased density of 23,200 square feet at the site, adding the potential of $2 million in value. The pad building that was subsequently created was leased to Famous Video.

Yet another set of negotiations centered around the freestanding building occupied by Phillips. The company held a lease which the seller's attorney felt gave them an option to buy. However, the validity of the option was unclear, and a lawsuit concerning the option was in progress at the time the center was purchased. Rather than risk the possibility that Phillips would win the suit, we sold at $300,000. Phillips' option was for $150,000.

Phase two:

Renovation plan approval

As lease buyouts progressed, another series of negotiations were also underway to gain renovation plan approvals from the two anchor tenants and from state and city government.

Both the Safeway food store and the Osco Drugs had provisions in their leases which gave them approval of any renovations. Safeway also had a tied in parking easement. Both anchors were destination tenants who were prospering despite the overall decline of the center. As a result, neither was motivated toward renovation.

A presentation was prepared for Safeway's regional office, showing pictures of the current center and drawings of the renovation and asking that Safeway agree to an adjustment upwards in lease rates or contribute to the cost of renovation. After several months of negotiation, the food chain was still unwilling to make any monetary contributions, even to cover the addition of new signage and a renovated facade for their space. However, they did make slight concessions on the signage, approved the plan, and allowed renovation to proceed.

A similar problem occurred in the negotiations with Osco. The local office of the company rejected the entire renovation plan. Management was forced to meet with representatives of the corporate headquarters before approval could be obtained. And again, Osco was unwilling to make any contributions or rent adjustments.

Ironically, after the fact, both of these anchors acknowledged that their sales had increased significantly because of the renovation and retenanting of Cherry Knolls.

Phase three: Completion

With all clearances from tenants and state and local authorities complete, the actual renovation of the center was carried out in six months (Figure 2). All tenants were able to stay open throughout the reconstruction.

At the same time leasing activities were underway. The upscale demographics of the area and the presence of regional malls in the immediate area helped dictate the leasing strategy for the property. Lower rents at the center especially attracted tenants who valued the location but did not want to pay the high rents of the regional. As a result, with hard work, tenant interest was brisk.

A decision was made to orient new tenants toward service business, rather than toward fashion or soft goods. Among the new tenants signed to the renovated mall by our own in-house leasing staff were a health food store, a liquor store, a hobby store, a video store, a bank, a computer store, a wallpaper store, a pet food store, and two restaurants. After a year, the property was 98 percent leased.

The renovation of this center had posed many problems, but in the end had been a good decision. Five companies had turned down the property before we bought it for $6.5 million. The $3 million spent on renovating the facade, constructing the new stores, creating new signage, and buying out new tenants was amply rewarded with improved performance. Net operating income rose from $650,000 to $1.2 million. The success of the renovation culminated in the sale of the property to JMB Realty for $13.4 million, with a cap rate of 9 percent.

With a little vision and a great deal of persistence, we were able to turn a tired has-been into a viable competitor.

Richard Landon is president of Landon Investments, Inc., which he founded in 1982 to acquire and develop real estate throughout the western United States. Mr. Landon has 20 years of experience in real estate leasing, brokerage, and development. He also has extensive experience as an asset manager for financial institutions, managing REO properties on a contract basis.

Landon Investments' current holdings include shopping centers, bank buildings, medical office buildings, and undeveloped land in Denver, San Francisco, Phoenix, and Canada.

PHOTO : Joining the two parts of the renovated centers increased overall traffic to smaller stores and added leasable space in the extension and in new pad areas.
COPYRIGHT 1989 National Association of Realtors
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Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Author:Landon, Richard
Publication:Journal of Property Management
Date:Jul 1, 1989
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