At A Glance

Investment Details

Block Real Estate Services ("Block") plans to acquire Greystone South Shopping Center ("Greystone") in Lenexa, Kansas through GDC, LLC, an entity managed by Stephen Block, a principal of Block Real Estate Services. Realty Mogul investors are being afforded the opportunity to invest in Realty Mogul 8, LLC, which will then invest directly into GDC, LLC.

Greystone has been a strong asset for several decades. In recent years, the property has been owned and managed by an out-of-town investor who has not reinvested in the property or maintained an active leasing presence in the market. Consequently, occupancy has declined in recent years to 74.1% in a market where average occupancy levels are approximately 90%.

Block has identified Greystone as an opportunity to purchase a distressed asset and complete physical, managerial and leasing improvements in order to generate a return for investors. Block plans to operate the property for cash flow while implementing an extensive redevelopment program aimed at substantially increasing rental income through modernizing the existing space, expanding the total rentable area, and attracting new tenants to lease the currently vacant space at significantly higher rates than current rental rates at Greystone.

Block is the dominant real estate operator in the region and has successfully secured a number of unique public incentives that will improve projected returns. These incentives include the ability to charge a special 1% sales tax within Greystone, which will be paid to Block as reimbursements for approximately $1,000,000 of planned physical improvements that Block will complete at Greystone. The city will also provide a zero-interest development grant of $350,000 to help fund the property improvements, which will be paid back after all investors, including Realty Mogul 8, LLC, receive a 12% cumulative return. In addition, the city has identified Greystone as a Neighborhood Redevelopment District project, a status that allows the project to capture 100% of any increases in real estate taxes over the base year (2014) for a 10-year period.

Block plans on holding the property for 5-10 years before exiting the investment but the hold period may be longer or shorter. Realty Mogul 8, LLC investors have the opportunity to participate as equity stakeholders in a property with existing, in place cash flow that also offers value-add potential through a strategic renovation and expansion program.

Investment Highlights

• Strong Sponsorship: The investment is being sponsored by Block Real Estate Services. Block, its principals, and their partnerships have leased, bought, sold and managed properties in over 200 cities across 38 states.​ They are the largest commercial real estate owner and developer in the City of Lenexa as well as the largest commercial management and brokerage firm in the Kansas City metro area, allowing them to leverage their existing relationships and experience to substantially increase occupancy and profitability at Greystone from current levels.
• Opportunity for Immediate Value Creation Through Active Management and Leasing: While Greystone has been a strong asset for decades, the center has suffered in recent years due to a lack of property maintenance and insufficient leasing efforts from an out-of-town owner who has not reinvested in the property or maintained an active leasing presence in the market. As a result, Greystone is currently 74% occupied while the average occupancy rate in the market is roughly 90%. Block will provide management and leasing services at Greystone. As the largest commercial management and brokerage firm in the Kansas City Metro, Block will streamline operations and utilize its extensive tenant relationships to increase occupancy at Greystone.
• Potential for Significant Rental Rate Increases: Due to the condition of the property and lack of leasing oversight, current rental rates at Greystone average $9.12 per square foot, compared to an average lease rate in Johnson County of $14.00 per square foot. This represents a discount to comparable market leases in the area of approximately 35%. Block's lease-up projections are consistent with current market rents, but Block believes that there is potential for rental rate increases after the property is physically improved and professionally leased.
• Discount to Replacement Cost: Block estimates that the replacement cost for similar shopping centers is between $180 and $200 per square foot. Greystone's purchase price of $3.7 million or $58.97 per square foot represents a significant discount of approximately 60% to replacement cost.
• Rapid Debt Paydown: The loan used to acquire the project and construct the new building will be amortized over a 15-year term. This will enhance investor returns and reduce risk over time.
• Existing Redevelopment/Expansion Plans: Block plans to demolish the existing office building on the southeast quadrant of the site and build a new retail building in its place. The total project cost includes the construction of a new 6,500 square foot retail building on the site with a configuration that would improve the visibility of the existing center. This newer building will expand the overall rentable square footage of Greystone and is anticipated to allow Block to secure higher rents for the newer building than currently attainable at the existing office building. The new building is planned be done on a build-to-suit basis upon entering into a lease with a qualified tenant. If offered the right price, one alternative would be to sell the pad site and recognize an immediate return on equity.
• Limited Sale Marketing: Greystone was marketed by a small St. Louis brokerage firm. This firm is not well-acquainted with a large number of potential buyers in the Kansas City market and lacks the bandwidth to complete a national marketing campaign. The investor offering featured a two-page flyer without investor highlights or financial information, making it difficult for potential buyers to evaluate the opportunity. Block spent considerable time interacting with the owner and manager to obtain sufficient information to assess the property before making an offer. Ultimately, the lack of exposure and available information limited the buyer pool, allowing Block to negotiate directly and obtain the best pricing.
• A Package of Unique and Attractive Public Incentives: Block is the largest commercial real estate owner and developer in the City of Lenexa. Consequently, Block has utilized its extensive relationships with city officials to obtain a package of public incentives to improve returns to investors. This package includes the following:
  • Neighborhood Redevelopment District Status (NRD): The city will grant NRD status to the project. This will allow the project to capture 100% of any increase in real property taxes over the base year (1/1/2014) for a 10-year period. Block anticipates that this will amount to approximately $385,000 over a 10-year period.
  • Community Improvement District Revenue (CID): Of the $1.9 million of planned physical improvements, approximately $1.0 million is eligible for reimbursement through a CID. An additional sales tax of 1.0% will be charged to tenants at Greystone, which will be paid to Block as reimbursement for these costs over the hold period. Block estimates that $971,000 of improvements and interest will be recovered over the hold period. If sales exceed the projections, the reimbursed amount will be higher. Through CID reimbursements, the actual cost of the roughly $1.9 million in planned capital expenditures that will be invested to improve, modernize and expand the shopping center over the life of the project is projected to be reduced by more than 50%. Additionally, if the property is sold before the end of the 22-year CID term, any remaining CID income will go with the property and will enhance the potential selling price.
  • Lenexa Development Grant: The City of Lenexa will provide a zero-interest development grant of $350,000 to Block to help fund the property improvements. Block will repay this grant by paying a percentage of future cash distributions to Lenexa after investors, including Realty Mogul 8, LLC, receive a preferred return equal to 12% of the cumulative cash return.

Risks and Risk Mitigation*

• Lease-up of Vacant Space: Given that the retail center is currently 74% leased, there is a risk that the vacant space will be difficult to lease. The low occupancy can be mainly attributed to the fact that the current owner did not reinvest to maintain the property and failed to have a strong local leasing and management presence. Block will provide management and leasing services. As the market's dominant leasing and management service company, Block will utilize its management professionals to streamline operations and its extensive tenant relationships to increase occupancy at Greystone. Furthermore, by significantly improving the property, Greystone will be significantly more attractive to a broader scope of tenants willing to pay higher market rents.
• Delays with Potential Redevelopment: In order to increase the center's rentable area and enhance the shopping center's visibility, the current business plan includes demolition of the eastern building and constructing an entirely new structure on the pad site. This plan hinges in part on the compliance of an existing tenant, Merrit Chiropractors, to voluntarily relocate the space that it currently occupies. This is the only tenant that is currently in the building. To increase the likelihood of cooperation from the tenant, Block has already engaged this tenant in conversations to relocate to another space in the center. As a longstanding tenant in Greystone, this tenant has indicated excitement about the prospect of Block's plan to significantly redevelop and upgrade the center and has been receptive to the idea of temporary relocation. Block has factored in providing the tenant with significant financial incentives, including significant money in the form of tenant improvements, to vacate the space. Although the tenant's cooperation is not guaranteed, Block believes that the tenant is strongly incentivized to do so. In the event the tenant chooses not to relocate, the tenant has the option to stay in its current space for as long as the next three (3) years. If this occurs, Block will have the ability to postpone drawing down on the $800,000 construction loan currently being set aside for the demolition and reconstruction of the eastern building without incurring any penalty from the lender and proceed with the remainder of the redevelopment plan.
• Rising Interest Rates: Over the past few years, the retail investment market has been bolstered by historically low interest rates, which have continually declined. In the event that interest rates rise, future financing for the property may become less favorable than anticipated. To mitigate the risk of rising interest rates, Block has locked in two 5-year loans at a fixed rate of 4.12%. The two loans total $3.8 million in collective funding, $800,000 of which is earmarked for the demolition and construction of the new building on the eastern pad. Block intends to refinance the loans after the redevelopment is complete and the project is stabilized. While Block believes that the redevelopment and stabilization of Greystone will be completed in less than five years, Block currently estimates that a refinancing will take place in year six with a new interest rate of 5.5%.

*The above is not intended to be a full discussion of all the risks of this investment. Please see the Risk Factors in the Investor Document Package for a discussion of additional risks.