Download PDFIn the Spring of 2021, HPP became directly aware of a corporate portfolio sale of several industrial assets across the country. All the buildings were occupied by the same tenant, a large but failing food processing company. Due to the older age, poor condition and heavy improvement of the buildings, the portfolio languished for many months, a rare situation during a time of strong national price appreciation.
As part of are structuring of their operations, the food company needed to quickly vacate one their assets located in Savannah, Georgia. Savannah was a market we had long considered entering but had not yet found an attractive local buy.
The building was enticing but would be delivered vacant, dark, and dirty. It had low property coverage with the 311,000 square foot building sitting on a generous 25 acres. Located a few miles from the port and adjacent to the freeway, this property was in a great location to attract the onslaught of logistics companies moving to Savannah because of the Port’s meteoric growth since the Great Recession.
When we bought the building, 100,000 SF of the interior was a dedicated sugar processing facility with a myriad of interior concrete block structures. Some of these structures and the machines contained within were two stories tall! Because we were renovating a sugar factory that had decades of improvements inside of it, some with drawings some without, it seemed like a good idea to hire the building engineer who was about to be laid off. It ended up being a great call, the guy was like having a walking set of plans.
From an investment standpoint, we could see why the building had not generated much interest. It took considerable imagination (and a lot of determination) to transform this sugar factory into a working logistics facility. After we gutted the sugar improvements, we realized that owing to decades of raw sugar refinement, every surface of the facility was now coated in what ranged from a fine mist of molasses to a lake of syrupy stuff. The property had to be deep cleaned from top to bottom, even some of the dock levelers were stuck in either the up or down position due to the amount of syrup that had gotten into the mechanics. After a new roof, completely renovated offices, exterior paint, parking lot repair and landscape renovation, we now had a 311,000 SF industrial facility with plentiful docks, excess yard space, great office improvements, and dual rail connections complete with a covered rail dock.
We had never purchased a building that would have a real chance of being in the direct path of a hurricane before. Years before we bought it, the building had, in fact, been hit by a “waterspout” (Read: mini water tornado) and had had a portion of its structure ripped away. It became clear that it would be key to pick a local contractor who had knowledge of how to fasten the roof to the building as well as the mechanical items to the roof. They presented us with a solution we had not seen before where the wind enters the hubs attached to the roof and that resulting vacuum “sucks” the TPO even tighter to the roof!
As the renovation came to a close, leasing activity picked up. We find this pattern to be common for the buildings we purchase. Most tenants cannot imagine the end product until they see it with their own eyes. We agreed to terms with a strong credit tenant and entered leasing negotiations. After a first round of edits, we realized they were essentially re-negotiating the lease by employing heavy edits. Later we found out they had agreed to terms with many landlords in an attempt to strike the best deal through multiple lease negotiations.
We then had strong interest from a mid-size third party logistics provider (a “3PL”) that had operations all over the globe. Their credit, however, was not strong and they only wanted about a third of the building. If they were to take the whole building, they would sublease the other two thirds. That was not a deal we liked.
Finally, we were approached by a 3PL based out of Indiana. They had a huge need for space in Savannah and a somewhat reasonable balance sheet for a building of this size. After an interview to understand their long-term plans we accepted the deal and moved forward.
After all the renovations had been completed and the tenant had commenced its lease term we started to look for a permanent loan on the property. Given the size of the loan, we enjoyed competition among multiple lenders and end up getting a very favorable rate at a size that was more than 85% of our total capital invested on the purchase price, renovations and leasing costs.
