Best Office Deal
- June 29, 2011
Sale of Deep Run I, 9950 Mayland Drive, Henrico County
(Former headquarters for Circuit City Stores Inc.)
DRCC Properties LLC
Eric Robison, Vice president, investment brokerage Cushman & Wakefield | Thalhimer, Richmond
A bankruptcy. A large vacant building. Separate owners for the land and the building. Those were the risks. On the opportunity side, Michael G. Pruitt, one of the principals for DRCC Properties LLC, could buy a 300,000-square-foot office building off West Broad Street near the interstate at a great price.
So he signed on for what turned out to be a complicated deal. The biggest challenge? Becoming the owner of both the building and the land underneath it.
When electronics retailer Circuit City Stores Inc. went bankrupt in 2008, it vacated two headquarters buildings in the Deep Run Office Park causing the owner, Lexington Properties, to default on the loans. As a result, the buildings were placed with special servicer, Berkadia Commercial Mortgage. Berkadia retained Cushman & Wakefield | Thalhimer to sell the property, and it went on the market in January 2010.
While Circuit City had been leasing Deep Run I for some of its 3,000 employees, it still owned the building’s ground lease, despite the bankruptcy. The conundrum: If Pruitt bought the building first, he could try to find tenants, but he still would have to pay rent on the ground lease — about $230,000 a year. Or he could try to acquire the ground lease first, which was for sale from a brokerage firm in New Jersey, and get the annual rent from the building’s owner.
If the defaulted owner stopped paying rent, Pruitt would get the five-story building for free. “Our goal was to end up with all of it,” recalls Pruitt, “but we didn’t know what was going to happen, because we were dealing with two parties. We were on two tracks.”
Eric Robison, vice president of Thalhimer’s investment brokerage group in Richmond, says other investors showed interest, but the deal wasn’t for the faint of heart. “The fact that it was a 300,000-square-foot building in a market that had a 30 percent vacancy rate at the time, and it was on a ground lease that carried a significant expense to the bottom line of operating the building even when vacant — that combination of challenges made it difficult.”
Pruitt planned to go after the ground lease first. However, he ended up making more progress on the building and purchased it for $3 million, or $10 per square foot. Then, last August Pruitt’s group offered $2.7 million in a bid for the land that was accepted by Circuit City. (Taken together, the square foot cost is closer to $20 per square foot.)
Finally, the land and building belonged to his local investor group, “but there were still unknowns,” recounts Pruitt. “How quickly could we lease the building?” It was 21 years old, and his company already had begun renovations, including a new roof.
In May, Henrico County-based Mondial Assistance USA, a travel insurance company, agreed to lease four of the building’s five floors. Pruitt expects other tenants to come knocking because he says the area — with easy access to Interstates 64 and 295 and Route 288 — has aged well. “Now you have coffee shops and restaurants and hotels that weren’t here when Deep Run was originally built. We felt it was worth the risk.”