Successful commercial real estate turnaround investments

Over the last 25 years, Larry Feldman and his company Feldman Equities, Inc. have focused on the acquisition of Class B office and retail assets in great locations.

Typical candidates for this turn-around strategy are enclosed malls of 500,000 to 1,000,000 square feet that require equity investments ranging from $10 million to $50 million. Office buildings typically range in size from 200,000 square feet to 600,000 square feet. By acquiring Class B property, the total costs of acquisition and renovation usually result in a total redevelopment cost (including lease-up costs) that is well below replacement cost.

Because these properties can be acquired far below replacement cost, they hold tremendous upside potential through the implementation of a major renovation plan and an aggressive leasing campaign to attract new tenancy.

At Feldman Equities, we believe that each of these properties has their own solution, provided that the location and demographics are right. More specifically, Feldman Equities looks for locations that are undergoing major population growth. For example, given the very high rate of growth that the Tucson, Arizona market is experiencing, the acquisition of the Foothills Mall gave Feldman the opportunity to own a mall in an area that will likely become a major market within the next five to ten years. Also, Tucson's strong population growth gives Feldman greater exiting liquidity for the property if it elects to sell the mall.

The Feldman strategy involves attracting the right tenant mix of premium factory outlets and specialty retailers which offer higher end designer label products at sharply discounted prices, combined with an entertainment anchor such as a multiplex theater and a series of upscale restaurants.

Feldman Equities also looks to fill its malls with a series of junior anchors such as Saks Off Fifth Avenue, LL Bean, Cheesecake Factory and Nike Factory Outlet. This strategy solves three problems at the same time. First, the mall is less dependent on the large department stores that have been steadily losing market share to the specialty discounters. Second, by filling the mall with a series of smaller junior anchors, the solvency of the mall is less threatened by the potential bankruptcy of a department store, or a decision by a department store to shut down a particular location. Third, by installing multiple junior anchors, the mall has a better chance of attracting a wider array of shoppers.

In addition, by bringing in smaller box tenants, Feldman is able to fill in certain "dead spots" in the mall that have poor pedestrian circulation. These junior anchors also complete certain missing tenant categories, thereby attracting more shoppers looking for a one-stop mall. The overall plans consists of a high quality renovation, followed by major and junior anchor re-tenanting, followed by an aggressive marketing and leasing campaign that is unique in the industry.

In addition to renewing existing high-volume and profitable tenants at the best possible market rents, this re-leasing process also includes weeding out unhealthy, low volume or unprofitable stores in a proactive way that allows failing tenants to cut their losses by buying out of their leases and applying the resulting short-term income towards incoming tenant inducements.

Effective property management and capital investment are also key to a mall's success. These investments vary from project to project, but include improving interior and exterior signage and injecting life into dead areas of a property, whether it is through special promotions, entertainment or filling vacancies with temporary users.

The successful mall turnaround may also include improving the visibility of tenants both inside and outside the mall, constructing new entrances or implementing ways to improve shopper circulation throughout the property. It also involves management support of intensive marketing programs geared to the local trade area and promotional activities that assure a constant flow of events occurring at the mall, such as musical performances, sports promotions, radio station events, club meetings, and hosting other civic and charitable functions.

Feldman Equities is confident that discount and entertainment oriented retail malls will continue to be successful through a recession era, as tightened disposable personal income will migrate to these discount retailers vs. the high-end retailers. At Feldman Equities, our hands-on approach to turning around distressed retail and office assets, combined with a near 100 year history of brick-and-mortar capability, have earned us a national reputation with investors for being ahead of the market and for producing above average returns.