Towering vacancy: scrambling to fill the TCBY Tower, John Flake tries to shore up its financing.
Scrambling To Fill The TCBY Tower, John Flake Tries To Shore Up Its Financing
Stand on any hill overlooking Little Rock, and you'll see a rising urban landscape, dotted with a handful of office skyscrapers.
Two of the pinnacles of white-collar industry -- the TCBY Tower and the Rogers Building, recently renamed the Stephens Building -- were built within the past five years and account for 24 percent of the available office space downtown.
Now that occupancy has stabilized at about 80 percent and financing is assured (Arkansas Business, Dec. 18, 1989,-Jan. 1, 1990) at the Rogers Building through an ownership reorganization involving Stephens Inc., the focus has turned to the TCBY Tower.
The 40-story tower is the most prominent feature of downtown Little Rock and the largest office building between Dallas and St. Louis.
Its architectural lines and smooth facade are striking when seen against a clear blue sky. However, upon close inspection of the TCBY Tower by riding the elevator from top to bottom and stopping to survey each floor, a measure of emptiness becomes apparent.
Approximately 80 percent of TCBY Tower space is occupied or committed to be leased, according to John Flake. He is chairman of Flake & Co., which is managing general partner of the Capitol Avenue Development Co. limited partnership, the building owner.
The occupancy rate, as reported at the end of December to the building's creditors, stood at nearly 73 percent, says Joe W. Perrone, assistant investment officer for the Teacher Retirement System of Texas, which gave the partnership $65 million in permanent financing for the tower.
Some property managers in Little Rock would love to have their buildings leased up to equal even the lower of the two figures for TCBY Tower occupancy. But as Flake & Co. aggressively pursues a full building, other property managers may have to wait anxiously on the sidelines.
A 20 percent vacancy rate at the tower with its net rentable office space of 626,000 SF is computed to be 125,200 SF, which is more than the total available space at each of many downtown office buildings.
SEEKING TO CHIP away at such a large space, Flake & Co. has reduced rent for new tenants to as low as $10/SF, compared to a standard rate of $18/SF. The higher figure was used in projections presented to the retirement system before it decided to provide permanent financing for the building in the winter of 1986. Projections have the building breaking even at 79 percent occupancy, but through December the partnership has added only 16 percent to the occupancy level the past three years.
Besides seeking to improve the tower's cash flow, Flake is also trying to prepare for replacement of a line of credit with First Federal Savings of Arkansas. The line of credit was rescinded by the Resolution Trust Corp., which assumed management of the insolvent First Federal in September 1989.
Flake & Co. drew $5.2 million on the $7.2 million line of credit to fund the tower's negative cash flow. Federal regulators notified Flake late last year that they could no longer draw on the line of credit, which was the lynchpin required by the Texas Teachers Retirement System before advancing its loan to the partnership.
Flake has been trying to put the tower's finances in order by raising its occupancy to 80 percent, while scurrying around to find replacement financing for the letter of credit. But the current environment for real estate financing is tougher than it was when the building was first financed.
There is an indication, however, that Flake & Co. may ask the retirement system to remove its requirement that the partnership maintain a line of credit. Perrone says his agency would consider such a request and may waive the requirement.
While tower partners are in technical default because they lost the line of credit, according to terms of the original financing agreement, and the building's vacancy rate is significant, Perrone says he is not alarmed because they have not yet missed a loan payment.
THE TCBY PROJECT is much larger than the approximately $50 million average for the 60-plus buildings financed by the retirement system, which has a $2.3 billion real estate portfolio and a 10 percent average annual rate of return. The system has only had four foreclosures totaling $230 million, and expects to get back all its money from three of the failed projects, Perrone says.
The cost of financing the TCBY Tower is 10 percent in interest and 45 percent of any profits, which have been non-existent so far.
The building's developers had been offered a 13 percent interest accompanied by a 25 percent participation. But they were able to negotiate a lower interest in exchange for a greater share in the profits, which according to projections, would have yielded the retirement system more than the 3 percent difference in interest, Perrone says.
While the developers are required to pay interest, they do not have an obligation to pay a participation in profits if the project remains in the red, Perrone says.
"It hasn't achieved pro forma or predicted results, but it's not falling on its face," he says.
His agency closely monitors the project, and its only concerns come from rumors circulating about tower owners' ability to make their payments. "The owner doesn't show any obvious signs of distress," Perrone says.
Given the current soft office real estate market in Little Rock, Perrone says he recognizes that tower owners have to take certain steps to get tenants into their building.
After a bidding war with its previous landlord at the First Commercial Bank building, Kremer & Associates Ltd. is scheduled to move into about 3,000 SF at the TCBY Tower next month.
The accounting firm's new lease, which runs for three years without an escalation clause, calls for payment of $10.25/SF and finish-out costs of $42,500 to be paid by the building owners, says William Kremer, president of the company.
What sold him on moving were the low rental rate, the finish-out subsidy and the non-escalation features of the new lease, he says.
Six percent annual rental increases were also built into original leases for the TCBY Tower. But, if Kremer's lease is any indication of a trend, escalation clauses have been kicked out of current tower leases.
FLAKE DECLINED A face-to-face interview regarding TCBY Tower, citing the press of business, but he did respond to written questions. Commenting on current leases, he says: "We have been fortunate to have several large tenants who require substantial expansion space and are experiencing rapid growth. In order to have this inventory of space available for their needs, and yet allow the building to sustain maximum cash flow...we have made some leases which are less than our building standard rate. This is a common practice in office buildings throughout the United States."
Kremer says he plans to stay at the tower for as long as eight years and become one of the growing tenants. "I hope that after three years I need a half of a floor instead of a quarter of a floor," he says.
There are other signs of lowballing rents and a creative approach using in-kind services and cash as payment for one new tenant's long-term lease. But long-time tenants, several of whom are limited partners and with Flake & Co. own the building, are unconcerned about the way the leasing situation has developed.
"We're happy with the transaction we consummated," says William Creasman, SVP and general counsel of TCBY Enterprises Inc., which leases 89,000 SF with an option on another floor of space (17,800 SF).
"Whether we're paying more or less than the next tenant is irrelevant. You have to look at the facts for each transaction."
He continues: "We're not upset somebody would have a different deal because we've got a good one.... One man's free parking may be another man's free carpet and walls."
TCBY owns 3 percent of the partnership that owns the building. "Until the market shifts from a tenant's market to a landlord's market, we as limited partners would appreciate any profitable transaction Flake could get for the building," Creasman says.
Arkansas Power & Light Co. owns nearly 50 percent of the partnership and with about 241,000 SF at $18/SF is the tower's largest tenant.
"You cannot evaluate a long-term investment in terms of one point in time or one tenant [who may be paying less]," says Jerol Garrison, an AP&L spokesman. "You have to look at it for the entire period of the investment."
When AP&L became a limited partner and tenant, it agreed to the best deal available for ratepayers, and it remains so, Garrison says. With its share in the partnership, the utility receives tax benefits enabling it to keep its electric rates down, he says.
Wallace, Dover & Dixon, which occupies about 53,000 SF and also is a limited partner, pays $21.44/SF with an escalator clause, says Larry Wallace, the law firm's managing partner. As part-owner of the building, the law firm supports Flake's efforts to generate revenue for the building, he adds.
With its higher rent, the law firm is building equity. "At least the money goes back in our pocket," Wallace says. "It goes out of one pocket to the other."
COMPETING PROPERTY managers take Flake's leasing strategy in stride, even though they say current rates may be just slightly higher than that charged for much lower quality office space several years ago.
"Rents are so much in flux right now that old rules regarding rates for Class A, B and C office space have pretty much gone out the window," says Jim Nosari, a partner in AMR Real Estate Inc.
Robert K. Beal, president of RPM Management Co., says, "They [owners of the TCBY Tower] can't cash flow at $10/SF, but it stops the bleeding a little bit."
L. Dickson Flake, a partner in Barnes Quinn Flake & Anderson, says rents have hardened in the last few weeks and that bargain rents are not as pervasive as rumors might have them.
Perrone professes confidence in the soundness of his agency's investment in the building, even though shades of reality are a different color than projections. A report presented to the teachers retirement system by The Lomas & Nettleton Advisory Group Inc. forecast that the tower, which was pre-leased at 57 percent before construction, would be 80 percent leased by the time the retirement system funded the loan.
In the same report, the financial advisor noted: "The vacancy level on existing Class `A' office space in the downtown market is less than 5 percent. Also, since very little space has come on stream since 1974, there is a pent-up demand for new office space.
"Furthermore, our borrowers have very strong business relationships within the community, and this coupled with the pre-leasing already committed makes us very confident that our 18-month lease-up will be achieved."
How times have changed and developers seeking to take advantage of demand have built a glut of office space. From 1984 until 1989, net rentable office space grew 72 percent to nearly 8.6 million SF from nearly 5.0 million SF, according to data gathered for the Arkansas Business Office/Industrial Lease Guide, published in September.
It's taken three years for Flake to get the TCBY Tower 80 percent leased, and it's been accomplished at rents below original projections. Market trends have blown apart dreams of profitability from the project, raising the question, "Can the partnership hold on?"
Because of its size, what happens to the TCBY Tower will have an effect on office rents throughout the Little Rock market and the ability of future developers to obtain financing for similar projects.
PHOTO : Flake addresses the crowd at the groundbreaking of what is now the TCBY Tower.
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|Author:||Kern, David F.|
|Date:||Jan 29, 1990|
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