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IN NEW TREND, CENTERS SOLD AS PARTS

With $400 in sales per square foot, the Torrance (Calif.) Crossroads is probably making its owners proud — all eight of them.

About two years ago, the 492,233-square-foot power center was divided up into eight lots and sold off to separate owners in an arrangement called a fragmented shopping center sale.

“This is another [1031 exchange] exit strategy that is being perfected,” said Gary E. Mozer, CEO of George Smith Partners, a Los Angeles-based commercial mortgage brokerage. Mozer says interest in fragmented shopping center sales has been growing for about 12 months now.

Professionals describe this investment structure as an offshoot of the red-hot 1031 exchange and net-lease markets. Obviously, fragmenting allows sellers to reach more investors, especially those who only want to spend between $5 million and $20 million on a retail property investment, says Richard J. Walter, president of Faris Lee Investments, an Irvine, Calif.-based brokerage firm that pioneered the structure with Torrance Crossroads’ previous owners, Pacific Coast Capital Partners and Lehman Bros.

Faris Lee has brokered two other fragmented sales: The Santa Margarita (Calif.) Marketplace, a 300,000-square-foot power center, which sold for $23.78 million, and the 212,000-square-foot Town Center Square, a neighborhood center in Rancho Cucamonga, Calif., which went for $24 million.

Investors also like fragmented shopping center sales because of the cap rate yields, Mozer says, noting that sellers sometimes get better cap rates by selling off pieces rather than the whole. “The anchors are more attractive,” he said, “because their credit is better.”

On the surface, the structure is simple. Sellers divide up a shopping center according to complementary tenant groupings that are then marketed to individual investors. Once the sections are sold, the buyers create an ownership association, which hires a property manager to supervise the common area. Members can require exclusivity clauses to keep other owners from adding, say, a competing retailer in their portion of the center. “You could block someone saying, ‘I’ll paint my store purple,’ or something,” Walter said.

Selling centers piecemeal can pay off for a seller, he says. Pacific Coast Capital and Lehman had bought the center for $107 million just 10 months earlier, having beat out nine other bids. In 2002 the eight fragments sold for a total of $138 million.

In physical terms, Torrance Crossroads may not have changed much in two years, but on paper it’s another story. Individual investors (most of them 1031 exchange buyers) took the Claim Jumper restaurant, In-N-Out Burger, Petco, Sam’s Club and Wells Fargo bank stores. Three anchors — Home Depot, a Long’s drugstore and a Vons grocery store — were grouped with smaller shops and sold as “microcenters” to separate buyers.

Invesco Realty Advisors, a Dallas-based institutional investment management firm, bought the Vons-anchored parcel — and so far, no complaints. “We would do it again,” said John R. Bellack, a partner in the firm’s San Francisco office. Not only did the portion meet its clients’ need for a supermarket-anchored retail project, Bellack says, but, thanks to the ownership association, “you know that no one will put in a nonconforming use.”

But this is not to say the approach is entirely snag-free. The complexities of multiple transactions can translate into higher legal costs, for one thing, says Walter. And in the time it takes for a property to be divided up sensibly, cap rates and interest rates can change.

Further, the fragmented structure works best with power and other types of open-air centers, but not so well with regional malls, which are harder to divide and require much more hands-on management, Walter says. All in all, centers that are in good condition and have reached their potential for expansion are the best candidates for fragmented sales, according to Walter. “No one is out to add footage,” he said. “These are maxed-out properties.”

The appeal of the fragmented sales device is moving east, albeit slowly. Faris Lee is working with Beachwood, Ohio-based Developers Diversified Realty Corp. to sell the 778,822-square-foot power center Plaza at Puente Hills, City of Industry, Calif. At press time, Faris Lee had lined up a group of tenancy-in-common investors to buy three parcels and was at work on the sale of four restaurant pads to separate 1031 buyers.