Auburn Retail Center I Updates and Future Plans

A lot of people have been asking for an update on the retail center we purchased in September of 2021, so here you go. 

In this article, we update you on our journey, recent improvements, future plans, financials, and lessons learned. We also want your input on potential paint options and property names. 

Property Overview:

• Purchase Price: $3,196,000 

• Built: 1985

• Size: 12,607 sq ft retail space on a 30,854 sq ft lot

• Parking: 43 stalls

• Financing: 4% interest, 30-year amortization, 10-year fixed rate

Improvements Made:

Our focus in 2022 and 2023 was to enhance the property’s curb appeal, attract more foot traffic, and elevate the overall shopping experience. Here’s some of the improvements we made: 

Upgraded all existing lighting to energy-efficient LED, since they are the most cost efficient light bulb on the market with longer lifespans than traditional halogen lights.

Installed wall pack LED lighting on the backside and eaves along the front, improving overall building visibility. This not only led to a substantial reduction in the property's utility bill but we also received PSE rebates that helped offset the initial costs.

Tenants have also shown increased customer engagement due to the brighter lights.

Repaired parking lot potholes and cleared overgrown landscaping.

Introduced festive Christmas lights during the holiday season. We hired a service that handles the installation, removal, and storage of the lights each year. 

Implemented a state-of-the-art security camera system for a safer shopping environment. This included nightly security monitoring. Crime and vandalism have decreased significantly as a result. 

Upgraded exterior signage for several suites, including Cycle Gear, our anchor tenant, to enhance vibrancy and ensure clear visibility. 

Future Improvements:

Looking ahead to 2024, additional renovation plans involve: 

Exterior painting. Here are two sample designs that we are considering: 

What do you think about the color schemes? Do you have any suggestions or ideas?

Repair curbs in the parking lot damaged by vehicles.

Replace rear side awnings, retrofit remaining tenant signage with LED lighting, and restripe parking lot.

Add the property name to the top of the parking lot pole sign. We're currently brainstorming names—any suggestions or ideas on what we should call it?

Apart from the remaining renovations mentioned, we do not foresee allocating additional funds for property improvements, aside from routine maintenance (e.g., annual pressure washing and window cleaning). We have done a lot to bring the property back to life, and our tenants have appreciated our efforts in ensuring a positive shopping experience. 

Financial Performance:

We increased rental rates upon lease renewals or exercised extension options. We successfully renewed the following tenant leases:

We had the option of bringing in a new tenant, a smoke shop, with the opportunity arising as one of our existing tenant's leases was up for renewal. Despite the tempting offer of receiving above market rent, we made the decision to decline. This choice was made due to our commitment to maintaining a family-friendly image. We believe this decision will attract diverse, long-term tenants who share our values, contributing to the overall success of the property.

Nevertheless, we conducted a return on cost analysis to determine the optimal strategy for handling the lease expiration. The options were to renew the current tenant's lease slightly below market rents without renovations or to undertake tenant improvements (TI's), leasing commissions, and face potential vacancy during construction/permitting and the time it takes to find a new tenant.

The current tenant has been operating on our property for over a decade and has shown a keen interest in staying, especially with the increased traffic resulting from recent property improvements. In response to the tenant's request for a 5-year term, we aimed to collaborate and accommodate their preferences.

Opting for a rent increase with the existing tenant resulted in a 14.72% rent growth for a 5-year term at 3% annual rent bumps. In contrast, investing $50,000 in tenant improvements (TI’s) at $45.45/SF, $7,920 in leasing commission (6% for a 5-year term), $1,500 in legal fees, and allowing for a lenient 3 months of vacancy (comparable size suite across the street listed for $24/SF), the return on cost for a potential $6,644 increase in annual rent would be 10.31%. Choosing to retain the existing tenant without incurring costs or downtime was a clear win for us.

Reviewing our year-end performance for this property, we outperformed our proforma expectations due to the following factors:

1. Initially, we accounted for vacancy at lease expirations in our original offer to the seller, but the actual performance exceeded this conservative estimate.

2. Beyond the proforma analysis, we engaged with tenants before closing to understand their intentions or exercising options. Our confidence in retaining these tenants, despite the conservative assumption of turnover, proved accurate.

3. We achieved a significantly higher rent than initially underwritten.

The initial proforma projected a property-level cash-on-cash of 7.29% for 2023. However, the actual cash-on-cash for 2023 exceeded expectations at 8.01%.

Additionally, we experienced over $46,000 in principal paydown, $20,000 in depreciation tax benefits, and conservatively assumed $60,000 in appreciation (realized upon a refinance or sale).

Lessons Learned:

Owning and managing a retail center has taught us a lot about how to effectively support tenants who, in return, make sure the place is well taken care of and pay their rent on time. Reflecting on the past few years, here are key lessons learned: 

Building early connections with our tenants turned out to be a game changer when it came to lease renewals. Despite the uncertainty in the commercial real estate market, positioning ourselves favorably during renewal discussions was crucial. Demonstrating unwavering support for our tenants, we addressed aspects aimed at enhancing both customer and tenant experiences. Through responsiveness, transparency, and friendliness, we showed our commitment to their success, recognizing that symbiotic nature of our landlord-tenant relationship.

Collaborating with our tenants involves mutual support rather than exclusively benefiting our interests. Operating expenses have risen universally in various commercial real estate sectors, particularly noticeable in insurance, repairs and maintenance, and property taxes. Our property insurance saw a substantial increase, mirroring the experience of most property owners.  

Given our tenants are smaller mom-and-pop owners, we decided to assume a landlord expense for the increase in property insurance and some HVAC related expenses. The reason for this is because we want to ensure our tenants continue to thrive, especially in this uncertain economy and trying to reconcile a marginal amount will hurt the tenants more than it will hurt us. However, in 2024, we raised the NNN costs to account for these real expenses and dispersed the reimbursement over a 12-month period, making it easier for our tenants to manage.

Additionally, we have a much better understanding of the intricacies involved with owning and operating a commercial retail center, including the dynamics of triple net leases, lease negotiations, building meaningful face-to-face relationships with tenants, and identifying improvements that prove the highest ROI. 

Lastly, we learned the importance of ensuring all our tenants maintain up-to-date insurance. This precautionary measure protects us from potential liabilities in the event of a claim. We learned this when two guys backed their truck into our building. Luckily, we captured this incident on video, and you can watch it here - it’s rather entertaining!

Unfortunately, an acquaintance in the real estate industry, who owns a property nearby, encountered a similar predicament with an uninsured tenant, resulting in substantial out-of-pocket expenses amounting to tens of thousands of dollars. 

We appreciate your continued interest and support. This update aims to provide a transparent look into the progress of our retail center and the growth of Michael Capital. 

Curtis & Garrett

P.S. We are currently looking to acquire another retail strip center within the tertiary markets of Washington. If you happen to be a broker or landlord, please share any potential deals with us!