Hillsdale, Value-Added Conversion Case Study: Well-Located Multi-Tenant Industrial Asset Re-Entitled for Multifamily Conversion

Opportunity

Strategic infill locations with inherent land constraints and changing demographics often support conversions to higher and better uses including high-density housing, office and retail. Prologis recognized the site’s potential to support multi-family housing and pursued re-entitlement for high-density urban housing and office.

Challenge

Prologis purchased the property shortly before the downturn in 2008. The team immediately commenced re-entitlement efforts with the city and adjacent property owners as both housing and industrial markets changed dramatically. At the time, prospective tenants were looking for long-term leases at low rates and the city was supporting conversion of the site into high-density housing. Successful execution entailed maintaining operating cash flow during the recession, structuring flexible leases with tenants and protecting the right to use the property for industrial purposes while rezoning to residential.

Solution

The Prologis team developed a leasing strategy that lowered rents in advance of the anticipated broader market downturn in exchange for the option to terminate those leases with just 6 to 12 months’ notice. Tenant improvements and capital expenses were monitored closely to control costs.

This strategy served Prologis well. The team worked with the city of Foster City and nearby property owners to reach a flexible 10-year development agreement that allowed the property to be converted to multi-family or remain industrial. This allowed Prologis to structure industrial leases with termination options and take advantage of market timing to execute the sale for residential conversion.

In 2010 Prologis fully re-entitled the property, and in 2013 Prologis sold the property for a 25 percent premium over its in-place appraised value.
Prologis and the city cooperated on requisite off-site work, sharing costs with other local developers.

Lesson

Flexibility proved pivotal. Both flexible leases and flexible entitlements were important to prospective buyers.

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