When are the parts worth more than the whole? When savvy retail owners and investors need new deal structures to bolster property values and increase returns on investments in record time, for one. The success of recent break-up transactions prove that these strategies can result in significant value increases for an entire asset. While there is a certain level of risk involved, there can also be a much greater return.

Break-up strategies are also being used as a disposition tactic for retail properties that have been unsuccessfully placed on the market priced in their entirety. Large retail centers can be on the market for a longer period of time without a buyer, or at lower pricing, because there are a limited number of investors that can afford such a large purchase.

Break-up strategies are a solution because individual parcels are marketed by specific product size and credit level, which attract a larger pool of investors, including private companies, institutional investors and individual investors that continuously seek viable assets to meet the demands of a 1031 exchange. By creating a break-up strategy that attracts diverse investors, more competition can be created, which can result in higher sales values. In addition, certain unstable elements of the asset can be held off the market until solutions are identified, thereby allowing the majority of the property to be traded into the current vibrant market.

Success Story

Valued at more than $135 million, the sale of Torrance Crossroads brought attention to break-up strategies. Last year, El Segundo, Calif.-based Pacific Coast Capital Partners and its partner La Caze Development Company sold the 492,000-square-foot power center for nearly 30 percent more than the original highest offer for the entire property.

During a 10-month period, we advised the former owners and executed the nation's largest break-up strategy, by ultimately selling individual parcels to eight buyers — one institutional investor and seven diverse private investors — maximizing the value of the center. The result of the break-up was a $31 million increase in value in less than one year.

Since the successful break-up of Torrance Crossroads, more owners and investors are considering break-up strategies to maximize the value of retail properties.

Most recently, our firm announced a master-planned break-up strategy for a 218,540-square-foot portion of Plaza at Puente Hills in the City of Industry, Calif. The 477,000-square-foot shopping center is being marketed as a seven-parcel break-up strategy, allowing both private and institutional investors access to the deal. Plaza at Puente Hills is part of a master-planned break-up strategy crafted to maximize the value of the center, which is currently valued at $55 million in its entirety. Plaza at Puente Hills is jointly owned by Coventry Real Estate Advisors, Developers Diversified Realty and Prudential Financial, Inc.

Plaza at Puente Hills is parceled as 11 individual sections, but will be sold as seven separate transactions as part of the exit strategy. The seven separate transactions are being marketed as four pad sales and three additional multi-tenant parcels — one anchored by Smart & Final, one anchored by Office Depot and the final parcel anchored by Arby's and Jack in the Box.

Plaza at Puente Hills is a natural candidate for a break-up. We selected a seven-parcel break-up strategy based on the site plan, size and management of the property. By splitting the property into seven transactions and marketing each parcel by product size and credit level, we will be able to bring both institutional and private buyers into this exceptional offering and maximize the value of the center.

Break-Up Challenges

While break-up strategies can provide significant financial benefits, the process should not be taken without careful consideration and advanced planning to ensure success. Crafting break-up strategies is very complex and working through the many aspects involved, takes coordination and access to diverse investors.

One of the greatest challenges to the break-up at Torrance Crossroads was attracting diverse investors to a property that historically functions as a whole. To attract investors, each parcel was marketed by specific product size and credit level allowing both institutional and private buyers into the deal. This allowed investors who normally wouldn't have enough resources to acquire an entire retail center to acquire an individual parcel. As part of the process, we used our “trading floor” model to match both institutional and private buyers with the property types and values, allowing for faster closings. In addition, we utilized our aggressive marketing program to create competition, resulting in a higher level of bidding, thus driving value of each individual sale.

After securing eight investors for the property, the next challenge was getting the lenders involved. Because each investor required financing, we reached out to all the various capital partners, including local and national banks, Wall Street and life insurance companies. Starting with the most complicated requirements we worked systematically to secure all financing within tight deadlines.

The last challenge to the Torrance Crossroads break-up was getting all of the new owners to agree on the management and operational aspects of the shopping center. To accomplish this, a very creative commercial owners association was implemented to maintain the property's integrity and create communication between owners. While this may seem simple, many agendas and special requests were filled to achieve consensus. It was very critical to the process that we utilized multiple disciplines within our firm to manage various aspects of this execution.

Even though break-up strategies can be complicated and time intensive, more and more property owners are committing the time and resources to make sure they take more money off the table when a deal is closed. Break-up strategies, if properly structured and marketed, are proving to be an effective approach to maximizing retail investments.

RICHARD WALTER
President of Faris Lee Investments, an Irvine, Calif., retail investment advisory and brokerage firm.