Overview of the opportunity
With 500 new residential units in the pipeline within one mile, we saw an opportunity to redevelop and reimagine this dilapidated, 100-year-old former women’s social club that sits along the San Diego urban core neighborhood of Hillcrest’s primary commercial corridor. Absentee “trust” ownership had let this concrete, brick and plaster structure, with two floors and a mezzanine, deteriorate so that its only remaining occupants were illegal residential tenants. Aligned with the City of San Diego’s promotion of mixed-use development as it seeks to foster growth as a “city of villages,” our vision for renewal of this asset was designed to target companies looking for creative office space in an accessible neighborhood with little supply and to create a hip and sophisticated urban building that would attract national retailers with a community focus.
To negotiate an under-market purchase of the asset, we agreed to acquire the property “As Is” with illegal tenancies in place and without entitlements or approval for planned renovations from the San Diego Historical Society. A 1031 exchange provided equity for the acquisition, supplemented by $1.5 million in bridge financing.
STRATEGY AND IMPLEMENTAITON
Within 120 days of closing, we evicted all remaining tenants. Over a 14-month planning and approval process we convinced the San Diego Historical Society that the building had nothing of architectural significance deserving of preservation. We collaborated with the local community to brand the building as The Wall and invited artists to design and paint murals on the project’s east and west exterior walls.
The gut renovation of the structure included stripping the building to the studs and sandblasting all surfaces to expose brick and the original structural beams. With a modern, industrial aesthetic, we employed steel and glass finishes, a fully computerized lighting system that refracts natural light with solar tubes and incorporated a 100-square-foot green interior wall. The Wall now features all new life safety systems, new water service, and new MEP systems.
To attract creative and established office tenants to four demised Class A office suites each under 2,000 sf on the project’s 2nd floor, we built a new Lobby, new common restrooms and converted the existing mezzanine to an indoor/outdoor decked communal space offering potential tenants a full kitchen and event space to create a collaborative environment. Each office suite was built-to-suit, designed to minimize future renovation and leased with a 3-5 year lease term to established companies in the $5-$15 million annual revenue range.
Our innovative renovation and branding of The Wall attracted a waiting list of potential retail tenants for the ground floor. Within 60 days of marketing launch we signed an Australian high-intensity group fitness workout gym with over 500 locations worldwide to a 3,200 square foot space. The balance of the ground floor of 1,700 sf was rented to Fresh, a fast casual franchise with over 650 locations. Both retail leases were 10-year, triple net agreements.
While modernizing a very old and deteriorated structure is rarely a straight-line process, we were able to navigate the complexities and our success with The Wall was due to anchoring the project in the community and offering space options of a quality and utility historically absent from the growing Hillcrest neighborhood. We achieved actual NOI 10% higher than pro formas. With full stabilization expected in May 2018, we plan to refinance into permanent debt at 50% of stabilized value with a 5-year fixed note.