The Atrium Building Brings 67% Return on Investment
Client Challenge
At the end of 2014, an investor approached REMCO’s founder, Lisa Gerard, with the goal of acquiring one to two assets in West Palm Beach, Florida. The investor was The David Associates, a commercial real estate investment firm specializing in properties on the east coast of the United States. Their announced budget for this opportunity was $5-7 million of initial capital, which came with a request to not exceed a total investment cost of $10 million (including the acquisition process, capital improvements or leasing efforts).
Asset of Interest: Ownership Background
The Atrium Building after REMCO investor’s improvements.
Located at 324 Datura Street, West Palm Beach, FL
Located in the heart of downtown West Palm Beach, the Atrium Building was targeted for this opportunity. Up to this point in 2014, the building came with a history: it was a 65,000 square-foot office building whose largest tenant, the Health Care District of Palm Beach County, occupied 85% of its office space. When the Health Care District opted to vacate in 2010, the Atrium’s owner was faced with a challenge: to continue in business, he would need to bring the building’s occupancy from 15% to over 75% in a short time span. The building required a significant capital injection to make the 85% interior vacant space marketable, as well as the exterior of the building which lacked personality, marketing and curb appeal.
Unfortunately, after having bought The Atrium back in 2009 for $8 million, given the aforementioned circumstances, the owner was forced to sell the building below its market value in 2012 for $3.5 million. The 2012 purchaser acquired both the equity and the debt of the building, meaning it was now up to him to rent out the vacant space.
Considering this new owner purchased the building extremely below its market value and had a large higher-performing portfolio, this asset was less significant to him. From 2012 to 2015, the owner brought The Atrium’s occupancy from 15% to 39%. REMCO recognized the opportunity that stood before both its investor and the 2012-2015 owner of The Atrium: the purchase of the building at an excellent rate, while at the same time allowing the seller to double his initial capital investment in just a few years.
The REMCO Solution
The parties agreed and Gerard purchased the building on behalf of her investor for $6 million (a time when purchasing an asset downtown for less than $100 per-square-foot was an incredible feat).
The favorable purchase details were the first in a strategy to up-level the investor portfolio’s potential. Next, about $2.5 million was spent in capital expenditures, including:
Major work façade: because the exterior of the building lacked personality since 2009, it was necessary to invest in the façade.
The term façade is used in French architecture and refers to the most important aspect of a building from a design standpoint—the front of the property.
Relocating the entrance: to take advantage of the view of a beautiful hidden interior atrium, it was necessary to relocate the entrance.
An atrium is a large open-roofed entrance typically found in Ancient Roman architecture.
Interior repairs: in order to make the vacant office space marketable, the office space was redivided and the air conditioning was repaired, while the building’s elevator was remodeled and stairwell was redone.
Leasing units: included in the capital expenditure allocation were also the costs associated with leasing vacancies, such as marketing, tenant screening and brokerage fees.
The newly remodeled entrance to the Atrium.
Source: loopnet.com
In addition, around $1 million was spent with “carry costs,” such as mortgage interest, property taxes and operating expenses.
Carry costs are the recurring expenses a property owner must pay through their asset ownership.
Overall, the operating costs exceeded income the first few years, but it was worth it when initial capital investment, capital expenditure and carry costs summed up to an “all in” investment of $9 million (total investment).
In 2021, the investor’s patience and understanding of the long-term strategy proved worthwhile when he sold the building for $15 million—a 67% return on investment.
