Property

Value-Added Case Study

The Shops at Kalakaua
Honolulu, HI

 

Introduction

The Founders of Parallel Capital (“Parallel”) have had a successful history of accessing and investing in value-added properties. Our goal has always been to reposition the property within its marketplace and to maximize its value. In short, we migrate value-added properties to core investment status. This is the story of one of these properties – The Shops at Kalakaua.

The Shops at Kalakaua

On July 31, 2003, Parallel’s founders purchased the empty 2150 Kalakaua retail complex located on Kalakaua Avenue in the heart of Waikiki. The property contained four retail suites totaling 11,671 sq. ft. and a small vacant land parcel.

The seller, an absentee Japanese owner with a reputation of being difficult, had unsuccessfully marketed the property several times over the preceding four years. At roughly $1,600 per sq. ft., the asking price was excessively high for a series of vacant Waikiki storefronts, even given the prime Waikiki location. Parallel had watched for over a year as the property went in and out of escrow several times (each time falling out primarily due to contention over the price), and decided to take a different approach. By approaching the owner through a Japan-based broker and offering a combination of a quick close and a large deposit, Parallel successfully struck a deal at $10.5 million ($900 per sq. ft.) – significantly below the asking price of $20 million.

Our VOP and HOOPs Programs

Immediately after closing, Parallel’s team implemented its Value Optimization Plan (VOP) and High Occupancy Optimization Plan (HOOPs). The interior improvements were demolished, the exterior facades were redesigned and reconstructed to bring them forward in-line with other Kalakaua storefronts, and a new modern signage program was instituted.

An aggressive marketing campaign was implemented to raise awareness of the renovation and new management, and within 12 months, long-term leases with creditworthy tenants in all four spaces were signed.

In October 2004 (14 months after the purchase), Parallel sold the vacant land parcel to ABC Stores for $2.6 million. In March 2005, with the VOP Program complete, the storefronts were sold to a publically traded REIT for $26,000,000 ($2,228 per sq. ft.).

Our Performance

Parallel purchased The Shops at Kalakaua for $10,506,000 and invested an additional $3,285,315 to reposition and re-lease the building. The total investment of $13,791,315 was funded with $4,791,315 in equity and $9,000,000 of debt financing.

With the sale of the land in October 2004 for $2,600,000 and the building in March 2005 for $26,000,000, Parallel recognized a net sales profit in excess of $14,808,585. When the sales profit is added to the operational cash flow during the holding period, the investment resulted in an unleveraged IRR of 62.1% and a leveraged IRR of 134.7%.