Chain’s loss, church’s gain?Construction, FACILITIES Friday, August 31st, 2012
By Rob Baird
Why a retail center could be a good investment for your congregation.
Around the country there are areas where retail shopping centers were aggressively built during the past decade. Many of these centers are in extremely good locations and today can be purchased at prices that are significantly below their current values and the costs it would take to build the same structures today.
With the bust of the housing bubble in 2008, a commensurate effect was the slowing of the retail economy. Food chains that are usually the anchor tenants of these centers quickly reigned in their expansion plans. In some cases where chains had built too many stores during the boom, Chapter 11 bankruptcy was declared. Subsequently, in the reorganization steps, many stores were closed.
These events left vacancies in many locations and have created an important opportunity for investors to purchase excellent centers for a small portion of their original value or cost. As an example, a 67,000-square-foot center that originally cost $6 million in development costs, and had $3.5 million of additional equity funds invested by the original buyer, was recently purchased from the bank for $3.6 million, including some improvement costs required.
Centers like this were typically built on the basis of a return of 7 percent to 9 percent to the original buyer, with rents that allowed for this return after operating expenses. In the industry, this is referred to as the capitalization rate of return.
What’s an ideal investment?
The key to a good purchase in a suppressed market is to buy at a price with severely reduced occupancy, which offers in-place 7 percent to 9 percent return. If this type of purchase has 60 percent occupancy, with the vacancy filled over a two- to three-year period at market rates, the gain in return on original investment can be substantial.
A retail center may be an ideal investment when a church has two fundamental qualities:
- The church has “patient money” funds to invest. The money will not be required for the conduct of the church and can be demonstrated to the congregation as funds well used. A good purchase often requires an all-cash buy from the bank or the troubled owner in order to command the lowest prices. Depending on the size of the retail center to be purchased, can your church tie up $1 million to $10 million for a period of three to five years?
- The church knows how to use this particular asset to meet the needs of their community. Examples are many, but among them are: (a) a clothing and household merchandize outlet for the needy; (b) a meeting place for gatherings that are not easily made available on the church campus; (c) a recreational outlet for teens and tweens; and (d) a Christian bookstore.
Most shopping centers are considered to be triple-net investments, meaning the tenants pay a base rent and, in addition, contribute a proportionate share to the shopping center’s operating expenses, such as taxes, insurance and common area maintenance.
A great value of a retail center is that it can be either self-managed or managed by a professional real estate firm. Also, the parking allotment is usually five or more cars per thousand square feet of useable space. This is ideal for any church that can see the value of space, with adequate parking, for many of its long-term needs.
Benefits to smaller churches
A possibility may work for smaller or start-up churches in locations previously held by pharmacy stores or smaller businesses. Parking in these locations are too limited for a large church, but can be ideal for a smaller congregation that is favorably capitalized.
Often, a church member may step forward to assist the church in buying a property in a commercial location that will improve in value over a longer-term hold. An agreement can often be worked out between the church and the provider of the funds that can protect each party and cover any risk.
Most churches have members or attenders who are licensed real estate agents. However, a word of caution: If you want to invest in a retail center, look for a real estate professional who not only understands commercial investment, but can also relate to the investment goals contained in your church mission.
Lastly, this article is not intended to discuss the issue of tax consequences. It is believed that a church would have to recognize the non-church usage as ordinary income, while any other usage by the church would qualify for its nonprofit status. This should be carefully discussed with church leadership and accounting or financial advisors.
Rob Baird of Robert R. Baird Enterprises, Chandler, AZ, has 37 years of experience in commercial real estate. www.capratecommercial.com