under both the Adaptive Reuse Ordinance and governmental agencies — coupled with COVID-19 shutdowns in 2020 — led to construction delays . Ultimately , the property received a certificate of occupancy in May 2021 , an approximately three-year construction time frame from start to finish .
“ This is an extremely exciting project for us ,” says Eddie Lorin , co-founder and CEO of Alliant Strategic Development . “ An opportunity like this , to turn a historic building in the heart of Orange County into attainable housing for the local workforce , is special for everyone involved . … This project is a leading indicator of how older , vacant buildings are being converted into modern and productive buildings for the benefit of the community at large .”
UNDERWRITING AND FINANCIAL STRUCTURE 888 On Main presented challenges and opportunities when it came to underwriting and structuring the capital stack . Caribou Industries , the developer / contractor went under contract to sell the property to a new real estate investment group led by Alliant Strategic Development in 2019 when the project was approximately 50 percent complete . The acquiring investment group agreed to pay $ 54 million for the project .
The project is unique from a financial perspective in that the new investment group incorporated the opportunity zone benefits , obtained Mills Act property tax incentives , and had to underwrite rents and operating expenses without any recent data points on adaptive reuse comps in the submarket .
During due diligence , the investment group completed a rent study , which provided a baseline for underwriting , but it did not identify any comparable high-rise adaptive reuse projects because no comps for this type of property were in the market . Most of the rent comps were for newer lowrise apartment communities that did not have the views nor the amenities of 888 On Main . The new investment group had to take somewhat of a leap of faith that they would be able to meet or exceed their baseline rent where no precedent had been set in the market . Ultimately , the buyer believed that their underwriting of an average rent of $ 2,194 per month ($ 3.60 per sf ) was not only achievable for a Class A property , but also allowed them to meet the needs of the workforce housing market at 80 percent to 120 percent of the area ’ s median income .
The investment group also took advantage of some lucrative financial incentives with the project , including qualifying for the California Mills Act incentive because the property was a landmark building on the Santa Ana Historic Register . This incentive provided for significant property tax savings
CREATIVE REVITALIZATION
that would help enhance the net operating income on the project after closing .
While under contract , the investment group was involved in funding the remainder of the construction and acquired the vacant property with bridge financing in 2020 . The project received a certificate of occupancy a few months later , in early 2021 . The investment group ’ s goal was to lease and stabilize the property at +/ -90 percent occupancy and refinance out the bridge lender .
Since the property is also in a qualified opportunity zone , the new investment group
The new investment group had to take somewhat of a leap of faith that they would be able to meet or exceed their baseline rent where no precedent had been set in the market .
structured a portion of the capital stack to allow them and their investors to take advantage of these significant tax incentives .
PROPERTY MANAGEMENT AND LEASING Maxus Management took over as the property manager , and the first resident moved into the project in July 2021 . There were 21 total move-ins by the end of that month . Less than a year later , in March 2022 , the project was 88 percent occupied with the goal of stabilization by April 2022 . This leaseup time frame exceeded the expectations of both the investment group and property management . Additionally , the rents that the manager achieved in this first year exceeded the rent that the investment group originally underwrote for the deal . The proactive marketing campaign by management , incredible unobstructed views , central location , and property amenities attracted residents to 888 On Main .
While the lease-up has been successful , management has faced and addressed several challenges that are somewhat unique to an adaptive reuse project . One challenge is that there isn ’ t a trash chute for each floor . In response , management hired a daily trash service for the building . Additionally , the live-work spaces on the first floor have been the most challenging floorplan to lease . The concern of privacy from the street is the largest concern from residents . To overcome this objective , management is rebranding these to flex lofts as well as focusing on networking with corporate companies and setting up a few of the units as furnished , short-term living options .
CONCLUSION Adaptive reuse has been a trending topic in commercial real estate for years — something that gained interest well before COVID-19 .
But in the wake of a pandemic that has fundamentally altered CRE markets , creative solutions are necessary to help rebalance assets across sectors . Whether turning vacant or underutilized shopping centers into logistical hubs or finding ways to meet growing demand for multifamily housing , adaptive reuse is a key tool for imaginative CRE professionals . 888 On Main successfully turned a vacant office property into a thriving 148-unit housing development that looks to be a crucial piece of an iconic Southern California downtown area . There were challenges and obstacles , but those are parts of any deal worth pursuing .
Jeffrey A . Gould , CCIM , CPM , LEED AP Principal and founder of
Lineage Asset Advisors Contact him at jeff @ lineageasset . com .
Michael J . Gion Principal at SAA Real Estate Advisors
Contact him at mgion @ saaia . com .
CIREMAGAZINE . COM COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE 31