The Property
Once we completed the acquisition of 4811 Highway 6 South in Missouri City, Texas (a former Albertson’s Grocery store which served as the anchor in this multi-tenant, multi-owner retail development), we needed to relocate Auto Zone, a tenant who rarely leases in-line space, to a pad site somewhere on the property. There needed to be enough acreage and land available to carve out a new pad site for development as well as accommodate parking for the center.
The Challenge
Auto Zone was in line as a tenant and had 10 years remaining on their lease. They are reluctant to have stores in higher income markets, so convincing them to move from in-line to a pad site plus pay higher rents was going to prove difficult. Also, we needed to make sure we had enough acreage to accommodate a new pad site within our existing property parcel. In addition, we also had to confirm there was sufficient parking area remaining after carving out this new pad site to handle the parking requirements of a 40,000 SF theatre and restaurant currently located in the center. The final challenge was getting the majority property owners within this multi-owner development to agree to a new building on this pad site.
The Solution
Auto Zone had certain financial concessions that had to be met in order to agree to be relocated. We were able to meet those requirements as well as negotiate a new 20-year lease agreement with 5, 5-year renewal options. We knew we would have to secure approval of our neighbors to allow their parking areas to be considered as common area parking to meet the theatre/restaurant parking requirements, and they did. This satisfied the Missouri City Planning Department, who then approved the platting of the pad site for new development. Finally, in order to secure approval from the majority of owners within the development for the new building, we had to convince them the location would not have a negative impact on visibility of the rest of the development. The solution was to build a mock Auto Zone elevation, depicting the size and height of the new building on the pad site. This convinced the other owners the new building would not adversely affect the entire development, and the new building was approved.
The Results
The new development of the pad site was completed on time and on budget. This freed up approximately 7,000 SF of in-line space that was then leased at market rents. The Auto Zone once completed was immediately marketed for sale.
- Limited Partners IRR: 54.92% (Proforma: 35%)
- Cap Rate at Sale: 5.98% (Proforma: 7.5%)
- Preferred Return Paid: 10%