Turnarounds - Suburban Shopping Center

Size and Type:
25,537 square-foot neighborhood retail center with two-story professional offices in rear.

Location:
Corpus Christi – Norton Street; a transitional neighborhood which was returning to a lower middle income family residential area; centrally located.

Condition at Purchase:
After reviewing the existing leases, we determined that taxes and insurance pass-throughs were not collected. Previous owners had the philosophy that if they did not charge high rent, the tenants did not have a right to request repairs. After several years of neglect, the previous owners decided to sell rather than make repairs. The building had graffiti on all the outside walls. There was a 4,000 square-foot vacancy behind which approximately 8,000 square feet existed but had nat been occupied in more than 10 years. At one time the space had served as doctors’ offices. The ceilings had fallen in because of roof leaks. Ceramic light fixtures lined the halls and the floor covering was worn linoleum.

Ownership
Purchased in October 1981 by a California investor. Cravey Realty Inc. was hired on a fee basis to manage and lease.

Management Action Plan:

  • Improve the property’s curb appeal by:
  • Patching and restriping the parking lot.
  • Repainting the entire exterior.
  • Hiring someone to keep exterior clean.
  • Survey office market to determine the level of demand and to establish sustainable lease rates and terms.
  • Repair and reopen the office space, tearing out all non-load-bearing walls, carpeting floors, installing new light fixtures and repairing air conditioners.

Implementation:
The owner budgeted $15,000 for the Management Action Plan. Other improvements were funded out of cash flow. We used innovative approachs to stay within the budget. We used carpet from the vacant 4,000 square-foot space to carpet the hallways and much of the first-floor office space. We bought brass light fixtures during a sale at $9 each. We collected first and last month rents in advance from new tenants and used those funds to finish out their spaces. The office and shopping center space was filled at an average 30 cents per square foot. The terms were usually month-to-month. All space was filled within 90 days. Once full, we slowly raised rents and extended lease terms. We found that while new tenants might be upset by higher rent after only a few months, they generally did not move out.

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Project Results
Gross annual rent continued to increase up to 113% after two years. In that period the average rent for office space went from 30 cents to 75 cents. This approach to rent escalation worked so well we began to use it on most of the buildings we wanted to fill quickly. After holding the property only 23 months, the owner sold it for 250% more thant the original purchase price. We continued to handle the leasing and management of the property under new ownership until 1985