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Uptown Shopping Center

When a REIT looking to exit the Portland market needed a quarterly earnings enhancement, we took notice. The property in question was an underutilized Class B shopping center just off of a major artery, in the center of one of the highest per-capita income neighborhoods in the city. To us, the opportunity was clear: the demographics of the neighborhood and the trends shaping the region were driving toward a major transformation of that part of the Burnside corridor. After engaging in extensive due diligence, including using outside consultants to assess the deal, we won the asset by offering non-refundable earnest money along with our offer.

First, we moved in-place rents to market, resulting in an immediate 35% increase. Then, we expanded the existing grocery anchor and transformed the look and feel of the property to more closely reflect the affluence of the area. By correctly assessing the real value of the lot, relocating the junior anchor, selling a portion of the parking lot for condominium development, and fine tuning the tenant mix, we were able to increase the grocery tenant rent from $9.36 PSF to $19.00 PSF, while increasing their square footage. This resulted in a 164% increase in grocery-related revenue.

After five years of guided evolution and strategic positioning, the asset was sold in 2007. We transformed what was once a Class B shopping center with rents far below market and tenants appropriate for a past era into a destination for Portland’s most affluent residents.

 

THE OPPORTUNITY

 

Uptown Shopping Center is a 100,000 SF, retail and apartment complex located at 23rd and Burnside in Northwest Portland. Situated at the foot of Portland’s most upscale neighborhood, the West Hills, it serves a neighborhood with Portland’s highest per capita incomes, highest median home prices and highest density of college-educated residents. With an excellent tenant roster of grocery, drug, service, food and specialty retail tenants, Uptown was considered a true “jewel box” carriage trade center, highly regarded and well-branded as destination shopping for better merchandise. At the time of purchase, Uptown boasted an average of 50,000 vehicles passing through per day.

SKB’s former CEO, Bob Scanlan, knew the property intimately, having previously sold it in 1979, while he was a senior executive with CBRE. The seller was a REIT that needed a quarterly earnings enhancement and was vacating the Portland market. Initially, there were 26 bidders for the asset. SKB anticipated that scenario and immediately engaged third-party, due diligence service providers to investigate and assess possible costs related to mold, seismic, HVAC, roofs and structural improvements, before making our best and final offer or taking any control of the property.

 

THE RESPONSE

 

Once all offers were vetted, the seller called SKB to inform them it was down to SKB and one other bidder—one whose financial resources were known to exceed SKB’s.

We probed the seller and discovered that our price, time to close and deposit amount were acceptable. Knowing we were close, we had to successfully differentiate our position above and away from the other potential buyer’s. We did so on that very same call, offering to convert our initially refundable $250,000 deposit to non-refundable earnest money—and to wire the funds immediately to the seller. Our only conditions were that the seller could not call the other buyer back to start a bidding war and had to accept our offer immediately on the call, giving SKB control of the asset.

The seller agreed. The purchase price of $20,760,000 ($207.48 PSF) was equivalent to an 8.78% cap rate on first-year net operating income.

Days after closing, SKB commenced negotiations with a developer to sell a portion of the parking lot for $2,750,000 to be developed as a luxury condominium project. (Thereafter, a 14-story, $54,000,000, 104-unit residential tower was completed that dramatically enhanced the property.) The $2.3 million proceeds of that sale were used to remodel Uptown Shopping Center’s facades; expand Zupan’s, the center’s grocery anchor; relocate Pharmaca, the junior anchor; and enhance Uptown’s signage and landscaping.

As a result of all these moves, SKB was able to increase Zupan’s lease rate from $9.36 PSF to $19.00 PSF with an extended lease term resulting in a 164% increase in grocery-related revenue. Other, near-term leases enabled us to remove slow-paying tenants and others who placed a burden on parking usage to increase rents, and to upgrade the tenant mix with well-branded, consumer-attractive additions, such as Starbucks and Chico’s.

 

THE SUCCESSFUL RESULT

 

The Uptown Shopping Center opportunity allowed us to flex our strengths in all areas—from exhaustive due diligence and skilled negotiation to crafting and executing a transformational business plan. True to our principle of focusing on the areas we know, we immediately recognized the local potential of this underutilized asset and were able to reposition it as a premier shopping center worthy of its demographic. As a result, we sold the property on schedule and well above our projected returns.

This case study does not necessarily reflect or predict the performance of any future transaction, or the actual performance of any other past transaction. The returns shown do not represent an overall track record, and returns and performance vary substantially transaction to transaction. In some cases transactions have resulted in the total loss of investment.

Overview

$

20.8

million

PURCHASE PRICE

$

6.6

million

TOTAL EQUITY

5

years

HOLD PERIOD

25.1

percent*

REALIZED IRR

*This overview does not necessarily reflect or predict the performance of any future transaction, or the actual performance of any other past transaction. The returns shown do not represent an overall track record, and returns and performance vary substantially transaction to transaction. In some cases transactions have resulted in the total loss of investment.

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