A New Life for 2040 Market?

The principles of Sant Properties, also principles of sister company World Acquisition Partners (WAP), tried to rock the Philadelphia landscape a few years back when they announced plans to develop the Schuylkill River waterfront in Logan Square, which was met with public backlash. Now, they're the ones getting rocked. Sant has been forced to sell some of their assets, as financiers for some of their halted development projects have come calling. Among those projects is 2040 Market St., in the heart of the Philadelphia CBD. The former AAA headquarters building was bought by developer John Turchi in 2004 for about $10.5 million and he flipped it to World Acquisition Partners in 2006 for roughly $20 million dollars. Sant/WAP had a similar vision, offering the property in 2007 for $30 million, with the potential to vertically develop the asset into a true high rise office tower. Yet, it has remained vacant since acquisition. In an ironic twist of fate, the seemingly failed project may have new life being breathed into it. According to multiple sources, a major accounting firm is in talks to occupy the entire four story office component, and the two largest drug store chains in the country are in preliminary talks to occupy the ground floor retail component. Sant/WAP may not be able to fully recoup the benefit of this purported activity due to CAP rate expansion. However, if rumors are accurate, the activity should at least create vibrancy in a once dead block of the city.

Dow Puts Rohm & Haas HQ on the Market

As you may remember, in April, chemical giant Dow Chemical acquired locally based Rohm & Haas. The firm is now planning to sell Rohm & Haas' former downtown headquarters, a 360,000-square-foot building located at 6th and Market streets on Independence Mall. It should be an interesting deal considering Dow likely will not lease back the entire building for any significant period of time, even though they currently occupy all of it. As is common with acquiring firms, Dow will likely be letting go a significant component of the workforce, and could eventually vacate the entire building, and the Philadelphia marketplace, relocating to Dow's headquarters in Michigan.

Foxwoods Makes Progress

City Council has unanimously approved a zoning bill to allow Foxwoods Casino to be built in the old Strawbridge & Clothier building at Eighth and Market streets. The zoning approval is an important step for the partnership behind Foxwoods to transfer its planned slots parlor from the Delaware waterfront in South Philadelphia to Center City, but is by no means the last. Foxwoods still must ask the state Gaming Control Board for permission to transfer its license to the Strawbridge site. City Councilman Frank DiCicco noted that Foxwoods must also receive approval for a plan of development from the city Planning Commission, and work out a lease with its landlord.

Murano Melee

Last week came the shocking news regarding the public auction of 40 units at the Murano, the Philadelphia skyline's aesthetic new marvel, and developer Thomas Properties' new nightmare. Thomas Properties, owner and developer of the twin Commerce Square buildings located next door to the Murano, is clearly being pressured by its lenders, MetLife and Corus Bank. As there were 178 of a total 302 condo units still unsold as of last month, Thomas Properties hired Accelerated Marketing Partners to auction a lot of 40 condos, ranging from the smallest one bedrooms (743 square feet) to large two-bedroom units over 1,700 square feet. Minimum bids will start at around $300 per square foot, or roughly 50% below the original prices, and the auction is to be held at the Westin on Saturday, June 27. I had a chance to inspect the building and some of the units, and one thing remained clear. While the building and amenities are definitely luxurious, the layout of the units is what is likely keeping buyers away. The kitchens and bathrooms are magnificent and massive, but unless you plan on sleeping in either one, are not very practical. They are way too big as a percentage of the total square footage of each unit to be truly livable, and it looks like I'm not the only one who thinks that, as evidenced by the paltry sales to date.

Is the Ritz all Glitz?

Conversely, The Residences at Ritz-Carlton developer, Craig Spencer, isn't giving out a dime in concessions. While sales at the new super-luxe high rise overlooking City Hall are not going as well as previously reported, Spencer isn't struggling, and is making no apologies for it. In a recent interview with the Philadelphia Inquirer, Spencer claimed, "I turned down a $1.3 million all-cash sale from a buyer who wanted me to cut the price by $50,000. I wasn't going to destroy the values we built into this project. I knew that the minute he closed, he'd tell me not to do the same thing for anyone else. They ask for a discount, they get zero." Now, while we would be remiss not to take what a developer says about the greatness of their projects with a grain of salt, one has to wonder whether the Ritz-Carlton brand has anything to do with the project's relative success.

A Sign of Hope?

According to Spencer Yablon, regional manager for the Philadelphia office of Marcus & Millichap, deals placed under contract have increased fivefold for his collective stable of brokers since the end of 2008. While that may suggest that the bid-ask gap has started to narrow between buyers and sellers, Yablon cites creative deal structure as the main impetus for getting deals done in this environment.

Marcus recently closed on Goodnoe's Shopping Center, a newly constructed Class A shopping center located in Newtown, Bucks County. Marketing the 35,653-square-foot center presented numerous challenges. The cost of construction was extraordinary as the property was built with very high end finishes. As the transaction progressed, the markets were deteriorating rapidly, and buyer and seller began scrambling for ways to save money.

However, both principals were committed to the transaction. Ultimately, they structured the deal as an "89-11" transaction which allowed for substantial tax savings and led to a closing in March. Pennsylvania realty transfer taxes are among the highest in the nation, with rates in most jurisdictions totaling 2% (4% in Philadelphia). Because taxes are only imposed on the transfer of 90% or more of the interests in a "real estate company", the venture was able to meet its short term goal of creating enough savings to get the deal done.