Property Property

Value-Added Case Study

La Jolla Galleria

La Jolla, CA
 

Introduction

The seller of this asset was an offshore, passive investor based in Germany who acquired the property in 1998 as a pride of ownership asset. The departure of a 17,000-square-foot tenant in 2001 coincided with the seller’s desire to reduce exposure to U.S. real estate. The property was placed on the market in January 2002 and quickly placed into escrow with a local developer who intended to convert the top two floors to residential condominiums. This buyer could not move quickly enough, lost his hard-money deposit, and the seller terminated the escrow. By the time the condo developer was bounced out of escrow, the German owner was anxious to consummate a sale of the asset. Parallel’s Founders (“Parallel”) had been tracking this potential opportunity for months and were able to negotiate a favorable purchase of the asset prior to its being formally re-listed for sale. 

La Jolla Galleria

La Jolla Galleria consists of a three-story 54,291 square-foot office/retail building located at the corner of Fay Avenue and Silverado Street in La Jolla, California.  At acquisition, this property was a classic Class “B” building in a Class “A” location that was sorely in need of significant capital to prevent it from slipping further into decline. Located in the very small and tight office market of The Village in La Jolla, this building was a gem in the rough just waiting for the right combination of vision, muscle, and capital.

Constructed of reinforced concrete, the well-maintained building has a modern appearance, featuring an interior office atrium, below-grade retail plaza, balconies with copper-clad awnings, and operable windows opening onto the atrium and street. Two elevators provide tenants and visitors with direct access to office floors from the garage and street levels. Current tenants included TD Waterhouse, Coast Mortgage, Charles Schwab, and Carlisle Enterprises. Secure underground parking at a 3.5/1000 ratio is almost unheard of in The Village, and presents both an attractive amenity for tenants, but more importantly, an opportunity for increased revenue.  

Our VOP and HOOPS Programs

The Value Optimization Plan (VOP) for the La Jolla Galleria building included several critical steps necessary to re-brand this extremely well located asset to Class “A” status. The anticipated holding period was three to four years but was predicated on finding the right replacement tenant for the recently vacated large user (17,000 sf), making the property upgrades defined below, marking as many of the existing leases to market as possible during our holding period (anticipated to be over 80% of the space), and then selling into a strong investment market. The steps in the VOP included: • Complete a substantial exterior renovation of the property which included a new EFIS surface applied over the existing reinforced concrete façade, new balcony railings, and a new signage program for branding purposes.

  • Simultaneous with the above exterior renovation, once the large tenant vacated the building, an aggressive leasing strategy was implemented to consolidate the building vacancy on the top floor. This was accomplished by relocating 2 tenants off the 3rd floor into other space in the building and then demolishing every non-load bearing wall on the top floor to remove all dated materials and office configurations. The 20 year old elevators were upgraded/modernized (new controllers and digital control panels) and the interior cabs were refinished to bring the building into Class “A” condition both operationally and cosmetically.
  • Half-way thru the exterior and interior renovation period, a full marketing campaign was designed with the use of architectural story boards and direct marketing pieces designed to portray the new image and attractive features available to a large tenant in the “new” La Jolla Galleria. Every prospect in the La Jolla market was contacted several times in the process of finding the right tenant around which the re-branding of the building could be designed.
  • The changes to the building were self-evident to Smith Barney, who entered into a 10 year lease for the entire top floor of the Galleria – gaining significant signage, identity, and ocean views from its new location in the middle of The Village in La Jolla.

Our Performance

Within 18 months of the acquisition, Parallel had implemented every step in its VOP and was in a position to sell the asset substantially earlier than it had forecast in the original business plan. Since virtually all the leases in the building had been indexed to market rates through the re-tenanting effort, and given other investment opportunities, the asset was sold to a local pride of ownership investor. The 18 month investment yielded a whole dollar profit of $3.8M and a deal level leveraged IRR in excess of 29%.