Business as Unusual: Managing Commercial Property in Distress

Abstract

In January 2010, Benedict Clarke, general partner of a small real estate private equity venture, faced difficulty with one of his properties. When purchased in early 2007, Tulaberry Plaza was a thriving retail shopping center outside Orlando, Florida. The financial crisis and severe economic downturn forced Tulaberry's anchor tenant into bankruptcy and weakened the other tenants in the plaza. Clarke now faces pressures placed on him by his limited partners, who were shown rosy projections of the returns they would receive, and by his lender, who is presently taking most of the property's cash flow to satisfy required debt service. Clarke must devise a plan that presents the most logical and profitable way forward, while also justifying his actions to elicit the necessary support from the others involved in the transaction. The case asks students to make decisions from the perspective of Clarke, giving them an appreciation not only of the details of strategic decision-making in real estate leasing, but also of the interplay between lenders and equity partners when managing a commercial property in distress.

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

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Resources

Exhibit 1: Southeast Submarket of Orlando, Florida

Source: REIS.

Figure

Exhibit 2: Arial View of Tulaberry Plaza

Source: CoStar.

Note: Property outlined in yellow.

Figure

Exhibit 3: Aggregate Statistics: Southeast Orlando Submarket, Neighborhood Shopping Centers

Year

Full Year (Y) or Quarter Number

Inventory (SF)

Completions

Vacancy Rate (%)

Vacant Stock (SF)

Occupied Stock (SF)

Net Absorption (SF)

Asking Rent ($ per SF)

Eff Rent ($ per SF)

1995

Y

4,148,000

34,000

8.2

340,000

3,808,000

–51,000

$12.54

$11.19

1996

Y

4,148,000

0

7.6

315,000

3,833,000

25,000

$12.93

$11.60

1997

Y

4,559,000

411,000

6.1

278,000

4,281,000

448,000

$13.08

$11.85

1998

Y

4,559,000

0

5.0

228,000

4,331,000

50,000

$13.81

$12.55

1999

Y

4,588,000

29,000

6.0

275,000

4,313,000

–18,000

$13.69

$12.36

2000

Y

4,711,000

123,000

4.2

198,000

4,513,000

200,000

$14.48

$13.12

2001

Y

4,741,000

30,000

7.7

365,000

4,376,000

–137,000

$14.96

$13.28

2002

Y

4,868,000

127,000

5.3

258,000

4,610,000

234,000

$15.68

$14.36

2003

Y

5,182,000

314,000

6.6

342,000

4,840,000

230,000

$16.24

$14.89

2004

Y

5,319,000

137,000

6.1

324,000

4,995,000

155,000

$16.71

$15.32

2005

Y

5,367,000

48,000

4.3

231,000

5,136,000

141,000

$17.80

$16.22

2006

Y

5,485,000

118,000

6.5

357,000

5,128,000

–8,000

$18.79

$17.02

2007

Y

5,727,000

242,000

5.7

326,000

5,401,000

273,000

$19.03

$17.12

2008

Y

6,057,000

330,000

8.9

539,000

5,518,000

117,000

$18.50

$16.17

2009

1

6,165,000

108,000

11.7

721,000

5,444,000

–74,000

$18.27

$15.87

2009

2

6,165,000

0

12.2

752,000

5,413,000

–31,000

$18.16

$15.57

2009

3

6,165,000

0

12.1

746,000

5,419,000

6,000

$17.98

$15.32

2009

4

6,265,000

100,000

14.6

915,000

5,350,000

–69,000

$17.70

$14.97

2009

Y

6,265,000

208,000

14.6

915,000

5,350,000

–168,000

$17.70

$14.97

Source: REIS Q4 2009 Report.

Exhibit 4: Historical and Forecasted Economic Trends

Source: REIS Q4 2009 Report, Moody's Economy.com.

Note: Actual data through 2009. Forecast from 2010 through 2014.

Figure

Exhibit 5: Disaggregated Statistics: Southeast Orlando Submarket, Neighborhood Shopping Centers

Nonanchor Asking Rent Distribution ($ per SF)

Anchor Asking Rent Distribution ($ per SF)

Low

9.12

Low

6.92

 25%

13.85

25%

9.01

Mean

17.70

Mean

11.59

Median

15.88

Median

12.00

 75%

21.15

 75%

13.37

High

40.78

High

19.58

Nonanchor Asking Rent Growth Rate Distribution

Vacancy Rate Distribution

Low

–16.70%

Low

0.00%

 25%

–0.50%

25%

1.40%

Mean

–1.60%

Mean

14.60%

Median

–0.40%

Median

6.50%

 75%

0.00%

75%

22.90%

High

0.10%

High

90.30%

Source: REIS Q4 2009 Report.

Exhibit 6: Historical Realized Cash Flows of Tulaberry Plaza ($)

2007

2008

2009

Gross potential rent

1,480,734

1,418,700

1,457,065

Vacancy

78,293

106,485

100,948

Effective gross income

1,402,441

1,312,215

1,356,117

Other income

Expense reimbursements

298,631

270,825

272,458

Total operating revenue

1,701,072

1,583,040

1,628,575

Operating expenses

337,427

347,549

357,976

Net operating income

1,363,646

1,235,491

1,270,599

Total capex, TIs, and leasing commissions

85,287

87,294

94,983

Property before tax cash flow

1,278,359

1,148,197

1,175,616

Source: Created by the author for discussion purposes only.

Exhibit 7: Site Plan

Source: Tulaberry Plaza LLC.

Figure

Exhibit 8: Current Rent Roll, Tulaberry Plaza

Unit

Tenant

Industry

Size (SF)

Lease End Date

Current Rent per SF ($)

Current Annual Rent ($)

Lease Type

Current Expense Reimbursements ($ per SF)

Annual Rent Adj. (%)

1

B-1

Quizno's

Submarine sandwich/salad restaurant

1,400

12/31/16

32.00

44,800

NNN

6.31

2

2

B-2

Vacant

1,400

3

B-3

Papa John's

Pizza take-out/delivery

1,400

12/31/12

30.00

42,000

NNN

6.31

2

4

B-4

Jamba Juice

Drink-oriented restaurant

1,400

12/31/11

30.00

42,000

NNN

6.31

2

5

B-5

Great Clips

Unisex hair salon

1,260

12/31/10

30.00

37,800

NNN

6.31

2

6

B-6

Nature's Table Café

Café-style restaurant

1,790

12/31/16

30.00

53,700

NNN

6.31

2

7

A-1-5

Outback Steakhouse

Restaurant

6,401

12/31/23

10.15

65,000

Ground

3.20

2

8

A-6

Pike & Co.

Title and mortgage company

1,400

12/31/13

28.00

39,200

NNN

6.31

2

9

A-7

Polo Cleaners

Dry cleaners

1,400

12/31/11

32.00

44,800

NNN

6.31

2

10

A-8

Pak Mail

Shipping and packaging

1,400

12/31/12

28.00

39,200

NNN

6.31

2

11

A-9

Deep Nine Salon & Spa

Hair salon and day spa

1,400

12/31/14

28.00

39,200

NNN

6.31

2

12

A-10

Vacant

1,386

13

A-11

Total Family Care

Family medical practice

1,337

12/31/17

28.00

37,436

NNN

6.31

2

14

A-12

Family Chiropractic

Chiropractic office

1,400

12/31/10

28.00

39,200

NNN

6.31

2

15

A-13

Lakeside Pediatrics

Pediatric medical practice

1,387

12/31/18

28.00

38,836

NNN

6.31

2

16

A-14

Vacant

1,387

17

A-15

Vacant

1,388

18

A-16-19

Vacant

14,228

21

A-20

Chinese/Thai

Chinese and Thai restaurant

1,984

12/31/17

28.00

55,552

NNN

6.31

2

22

A-21

Florida Fever

Clothing and home furnishings

1,984

12/31/12

28.00

55,552

NNN

6.31

2

23

A-22

Animal Hospital

Veterinary medical facility

1,984

12/31/16

28.00

55,552

NNN

6.31

2

24

A-23

Home Meal Replacements

Catering

1,984

12/31/18

28.00

55,552

NNN

6.31

2

25

A-24

Insurance Office

Insurance office

2,000

12/31/17

28.00

56,000

6.31

2

26

A-25

Vision Center

Optometry, optical devices

2,000

12/31/10

26.00

52,000

NNN

6.31

2

27

A-26

Dentistry Office

General dentistry office

2,000

12/31/18

28.00

56,000

NNN

6.31

2

28

A-27

Sushi Style

Asian sushi restaurant

2,000

12/31/20

28.00

56,000

NNN

6.31

2

Source: Created by the author for discussion purposes only.

Exhibit 9: Anchor Tenant Possibilities

Tenant

Walgreens

Harbour Freight

PetSmart

Planet Gym

Tenant type

Anchor

Anchor

Anchor

Anchor

Industry

Pharmacy

Hardware Store

Pet Store

Fitness

Creditworthiness

S&P: BBB

S&P: B+

S&P: BB

Franchisee

Projected sales

$572/ft2

$308/ft2

$289/ft2

$78/ft2

Tenant improvements requirement (per SF)

$35.00

$27.00

$28.00

$44.00

Lease type

NNN

NNN

NNN

NNN

Term

25 years

15 years

15 years

15 years

Base rent amount range (per SF)

$12.00

$18.75

$18.50

$9.50

Rent escalations

0%

2% annual increase

2% annual increase

2% annual increase

Target demographics

Male and female, all ages, all incomes

Male, ages 25–55, wide income range

Female, ages mid-20s and 50s

Male and female, ages 18–45, low to middle income

Trade area

37,000 people

30,000 people, 30 min. drive

247,000 people

50,000 people

Location preference

Near intersection/drive-through

Visible, inline or self-standing

Anchor

Anchor

Parking requirement

Medium

Medium

Low

High (100 spaces)

Size requirement

10,800–15,000

12,000–15,000

18,000–27,500

12,000–20,000

Exhibit 10: Tenant Profile

Tenant

Starbucks

The Vitamin Shoppe

Ben's Tux Rental

Family Dollar

Tenant type

Restaurant

Inline

Inline

Inline

Industry

Coffee/food

Health and wellbeing

Formalwear rental

Value retail

Creditworthiness

S&P: A1

S&P: BB

N/A

S&P: BBB-

Projected sales

N/A

N/A

N/A

N/A

Tenant improvements requirement (per SF)

$39.00

$25.00

$20.00

$22.00

Lease type

NNN

NNN

NNN

NNN

Term

10 years

10 years

5 years

10 years

Base rent amount range (per SF)

$33.75

$25.50

$24.00

$24.50

Rent escalations

10% every 5 years

10% every 5 years

3%

10% increase every 5 years

Target demographics

Male and female, ages 25–40, mid-income ($75k or more)

Male and female, educated, health enthusiasts

Male, ages 18–30

Male and female, low and middle income, wide age range

Trade area

29,000 people

61,000 people

75,000 people

8,000 people

Location preference

Urban or suburban, on commuting side of traffic patterns

Highly visible

Cheap

Food store anchored, neighborhood shopping center

Parking requirement

Medium

Low

Low

Medium (25+ spaces)

Size requirement

1,700–2,700

3,000

1,200–1,500

7,000–10,000

Tenant

Salons

Payless Shoes

Local Furniture Boutique

Five Guys

Tenant type

Inline

Inline

Inline

Restaurant

Industry

Hair salon and day spa

Footwear

Home furnishings

Food

Creditworthiness

3-month security deposit

BB+

3-month security deposit

Franchisee

Projected sales

N/A

N/A

N/A

N/A

Tenant improvements requirement (per SF)

$22.00

$19.00

$20.00

$48.00

Lease type

NNN

NNN

NNN

NNN

Term

5 years

15 years

5 years

5 years

Base rent amount range (per SF)

$25.50

$23.50

$25.50

$33.75

Rent escalations

3%

10% increase every 5 years

3%

3%

Target demographics

Female, middle income

Female, ages 18–44, household income less than 75k

Male and female, ages 18-45, low to middle income

Young adults

Trade area

12,000 people

97,000 people

30,000 people

105,000

Location preference

None

None

None

Corner or end cap ideal, but will consider inline

Parking requirement

Low

Low

Low

Medium (35 spaces)

Size requirement

1,200–1,500

6,000–15,000

1,200–1,400

2,000–3,000

Tenant

GameStop

Ricardo's Bon Voyage

Plato's Closet

Verizon

Tenant type

Inline

Inline

Inline

Inline

Industry

Gaming

Travel agency

Clothing retail

Wireless service

Creditworthiness

S&P: BB+

3-month security deposit

3-month security deposit

S&P: A-

Projected sales

N/A

N/A

N/A

N/A

Tenant improvements requirement (per SF)

$35.00

$25.00

$24.00

$37.50

Lease type

NNN

NNN

NNN

NNN

Term

5 years

5 years

10 years

10 years

Base rent amount range (per SF)

$30.00

$25.50

$25.50

$40.00

Rent escalations

3%

3% per year

3% per year

0%

Target demographics

Male, ages 15–30

Male and female, ages 35–55

Male and female, ages 12–24

Male and female, ages 25 and older

Trade area

71,000

100,000 people

80,000 people

150,000

Location preference

None

None

None

Outlier/inline/endcap

Parking requirement

Medium

Low

Medium

Low

Size requirement

1,200–1,400

1,200–1,400

2,800–3,600

2,600–4,600

Exhibit 11: Demographic Information

Distance from Tulaberry Plaza

1-Mile Radius

3-Mile Radius

5-Mile Radius

Population

 1990 census

96

703

3,775

 2000 census

144

766

5,731

 2008 estimated

588

3,681

13,585

 2013 projected

846

5,305

18,059

Growth 2000–2008

308.46%

380.62%

137.05%

Growth 2008–2013

43.81%

44.10%

32.93%

Age

 2008 estimated median age

36.41

41.59

39.42

 2008 estimated average age

36.2

38.4

38.0

Number of Households

 1990 census

34

256

1,375

 2000 census

55

308

2,185

 2008 estimated

230

1,506

5,252

 2013 projected

336

2,187

7,022

Growth 2000–2008

318.71%

389.04%

140.38%

Growth 2008–2013

45.76%

45.21%

33.69%

Household Size

 2008 estimated average household size

2.9

2.69

2.67

Income

 1990 census median per household

$43,696

$47,503

$35,140

 2000 census median per household

$67,235

$67,398

$47,600

 2008 estimated median per household

$76,479

$79,310

$62,355

 2008 estimated average per household

$126,136

$115,161

$84,115

 2013 projected median per household

$72,396

$85,109

$68,939

2008 estimated per capita

$43,475

$42,728

$31,368

Housing Units

 2008 estimated housing units

296

1,684

5,999

 2008 estimated occupied units

230

1,506

5,252

 2008 estimated vacant units

65

178

747

 2008 estimated owner-occupied units

212

1,318

4,470

 2008 estimated renter-occupied units

18

189

782

 2008 estimated median housing value

$253,364

$332,615

$246,637

 2008 estimated average housing value

$447,935

$445,088

$313,645

2008 Estimated Households

230

1,506

5,252

 Income less than $15,000

18 (7.8%)

56 (3.7%)

299 (5.7%)

 Income $15,000 to $24,999

11 (4.8%)

77 (5.1%)

378 (7.2%)

 Income $25,000 to $34,999

15(6.5%)

97 (6.4%)

504 (9.6%)

 Income $35,000 to $49,999

46 (20.0%)

187 (12.4%)

815 (15.5%)

 Income $50,000 to $74,999

22 (9.6%)

285 (18.9%)

1,205 (22.9%)

 Income $75,000 to $99,999

54 (23.5%)

282 (18.7%)

863 (16.4%)

 Income $100,000 to $149,999

20 (8.7%)

272 (18.1%)

746 (14.2%)

 Income $150,000 to $249,999

12 (5.2%)

102 (6.8%)

203 (3.9%)

 Income $250,000 to $499,999

12 (5.2%)

84 (5.6%)

148 (2.8%)

 Income $500,000 and over

21 (9.1%)

64(4.2%)

89 (1.7%)

1990 census average household income

$46,464

$55,446

$43,695

2000 census average household income

$142,984

$113,924

$76,062

2008 estimated average household income

$126,136

$115,161

$84,115

2013 projected average household income

$127,035

$123,655

$92,066

2008 Estimated Households by Household Size

230

1,506

5,252

 1-person household

39 (17.0%)

244 (16.2%)

986 (18.8%)

 2-person household

75 (32.6%)

589 (39.1%)

1,933 (36.8%)

 3-person household

38 (16.5%)

262 (17.4%)

961 (18.3%)

 4-person household

46 (20.0%)

267 (17.7%)

832 (15.8%)

 5-person household

23 (10.0%)

108 (7.2%)

364 (6.9%)

 6-person household

6 (2.6%)

24 (1.6%)

110 (2.1%)

 7-or-more-person household

4(1.7%)

13 (.9%)

66 (1.3%)

2008 estimated average household size

2.9

2.69

2.67

2008 Estimated Households by Number of Vehicles

230

1,506

5,252

 Households with 0 vehicles

3 (1.3%)

27 (1.8%)

163 (3.1%)

 Households with 1 vehicle

82 (35.7%)

401 (26.6%)

1,705 (32.5%)

 Households with 2 vehicles

65 (28.3%)

667 (44.3%)

2,251 (42.9%)

 Households with 3 vehicles

47 (20.4%)

266 (17.7%)

791 (15.1%)

 Households with 4 vehicles

31 (13.5%)

117 (7.8%)

269 (5.1%)

 Households with 5 or more vehicles

3 (1.3%)

28 (1.9%)

75 (1.4%)

2008 estimated average number of vehicles

2.1

2.1

1.93

2008 Estimated Population by Race and Origin

588

3,681

13,585

 White population

515

3,414

10,979

 Black population

36

76

852

 Asian population

2

26

220

 Pacific Islander population

0

3

7

 American Indian and Alaska native

1

23

71

 Other race population

25

68

1,023

 Two or more races population

9

71

434

 Hispanic population

245

528

3,758

 White non-Hispanic population

316

3,064

8,802

2008 Estimated Population by Age

588

3,681

13,585

 Ages 0 to 4 years

51

242

891

 Ages 5 to 9 years

47

230

846

 Ages 10 to 14 years

39

239

881

 Ages 15 to 17 years

28

164

589

 Ages 18 to 20 years

18

145

524

 Ages 21 to 24 years

33

133

570

 Ages 25 to 34 years

70

337

1,600

 Ages 35 to 44 years

64

579

2,163

 Ages 45 to 49 years

49

409

1,263

 Ages 50 to 54 years

48

325

1,063

 Ages 55 to 59 years

46

295

954

 Ages 60 to 64 years

39

213

732

 Ages 65 to 74 years

39

244

923

 Ages 75 to 84 years

13

95

453

 Ages 85 years and older

4

29

132

2008 estimated median age

36.41

41.59

39.42

2008 estimated average age

36.2

38.4

38

2008 Estimated Population Over 25 by Educational Attainment

373

2,528

9,284

 Less than 9th grade

20

27

300

 High school, no diploma

33

208

1,059

 High school diploma

111

778

3,023

 Some college

74

492

2,028

 Associate degree

17

202

725

 Bachelor's degree

65

596

1,590

 Masters' degree

22

100

290

 Professional degree

31

94

189

 Doctoral degree

0

32

78

Exhibit 12: Partnership Financial Projections

2006

2007

2008

2009

201 0

2011

2012

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Gross potential rent

1,450,000.00

1,493,500.00

1,538,305.00

1,584,454.15

1,631,987.77

1,680,947.41

Vacancy

72,500.00

74,675.00

76,915.25

79,222.71

81,599.39

84,047.37

Effective gross income

1,377,500.00

1,418,825.00

1,461,389.75

1,505,231.44

1,550,388.39

1,596,900.04

Other income

Expense reimbursements

311,218.70

320,555.26

330,171.92

340,077.08

350,279.39

371,611.40

Total operating revenue

1,688,718.70

1,739,380.26

1,791,561.67

1,845,308.52

1,900,667.77

1,968,511.44

Operating expenses

327,598.63

337,426.59

347,549.39

357,975.87

368,715.15

391,169.90

Net operating income

1,361,120.07

1,401,953.67

1,444,012.28

1,487,332.65

1,531,952.63

1,577,341.54

Interest on mortgage

(625,966.75)

(616,733.41)

(606,783.26)

(596,060.66)

(584,505.64)

Memo: Principal repayment

(118,936.36)

(128,169.70)

(138,119.84)

(148,842.45)

(7,865,931.66)

Capital expenditures reserve

14,775.00

15,070.50

15,371.91

15,679.35

15,992.94

Leasing costs

Debt service

(744,903.11)

(744,903.11)

(744,903.11)

(744,903.11)

(8,450,437.29)

Operating cash flows

1,346,345.07

1,386,883.17

1,428,640.37

1,471,653.30

1,515,959.69

Reversion cash flow from sale

13,144,512.85

Property before tax cash flow

1,346,345.07

1,386,883.17

1,428,640.37

1,471,653.30

14,660,472.55

Acquisition cost

(12,000,000.00)

Unlevered cash flow

(12,000,000.00)

1,346,345.07

1,386,883.17

1,428,640.37

1,471,653.30

14,660,472.55

Unlevered IRR

13.29%

Acquisition cost

(12,000,000.00)

Debt proceeds

8,400,000.00

Levered cash flow

(3,600,000.00)

601,441.96

641,980.06

683,737.26

726,750.19

6,210,035.25

Levered IRR

24.77%

Partnership splits

Beginning balance

3,600,000.00

3,600,000.00

3,286,558.04

2,907,502.62

2,456,365.56

1,926,124.62

Preferred return

288,000.00

262,924.64

232,600.21

196,509.25

154,089.97

Total amount due

3,600,000.00

3,888,000.00

3,549,482.68

3,140,102.83

2,652,874.81

2,080,214.59

Payment made

601,441.96

641,980.06

683,737.26

726,750.19

2,080,214.59

Ending balance

3,600,000.00

3,286,558.04

2,907,502.62

2,456,365.56

1,926,124.62

Preferred return of capital

General partner 8%

(360,000.00)

60,144.20

64,198.01

68,373.73

72,675.02

208,021.46

Limited partners 8%

(3,240,000.00)

541,297.77

577,782.06

615,363.54

654,075.17

1,872,193.13

Project

(3,600,000.00)

601,441.96

641,980.06

683,737.26

726,750.19

2,080,214.59

Excess cash flow

General partner 30%

1,238,946.20

Limited partners 70%

2,890,874.47

Project

4,129,820.67

Net cash flow

General partner

(360,000.00)

60,144.20

64,198.01

68,373.73

72,675.02

1,446,967.66

Limited partners

(3,240,000.00)

541,297.77

577,782.06

615,363.54

654,075.17

4,763,067.59

Project

(3,600,000.00)

601,441.96

641,980.06

683,737.26

726,750.19

6,210,035.25

General partner IRR

42.63%

Limited partners IRR

21.88%

Cash-on-cash project

16.71%

17.83%

18.99%

20.19%

172.50%

Cash-on-cash general partner

16.71%

17.83%

18.99%

20.19%

401.94%

Cash-on-cash limited partners

16.71%

17.83%

18.99%

20.19%

147.01%

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

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