From Competition to Collaboration on a Creative Site Acquisition
By working together, Prologis and ML Realty Partners, along with brokerage firm Cawley Chicago, were able to complete a particularly challenging site acquisition of a neighborhood of 108 homes and move forward with industrial development on the site. Attendees at NAIOP’s CRE.Converge 2022 in Chicago had the opportunity to visit the newly constructed warehouse projects and learn how the site acquisition came together from presenters Sean Olvany, Prologis; Tim Geisler, ML Realty Partners; and Andrew Maletich, Cawley Chicago.
The site was a 70-acre residential neighborhood located in Bensenville, Illinois, in the heart of the O’Hare submarket. The submarket is the largest in the Chicago area, at 142 million square feet, with very little land available for new development. The neighborhood, which by 2019 was completely surrounded by industrial buildings, was an attractive site due to its location and large size.
However, the site presented a major challenge. The neighborhood consisted of 108 homes, which meant 108 separate deals to acquire the land. Both Prologis and ML Realty Partners took notice of the opportunity and separately began taking steps to purchase homes, unbeknownst to each other.
The two companies had different strategies for the site acquisition. Prologis began by purchasing one home that had been put on the market to get a foothold on the site. An employee was named on the title rather than the company, so that it wouldn’t be obvious that a developer had purchased the home. Their plan was to purchase houses as they hit the market and move forward in a piecemeal fashion over time. This mitigated risk as it kept their initial investment relatively small.
Meanwhile, ML Realty Partners and Maletich, their brokerage partner, began reaching out to homeowners to make initial offers and gauge their interest in selling. They also met with the city of Bensenville to pitch the project. Due to the potential increase in tax revenue, the city officials gave their support with the caveat that all homeowners in the neighborhood agreed to sell. Because ML Realty expected that it could prove difficult getting over 100 homeowners to sell, they formulated a plan to limit their investment and risk. They established a go/no-go date by which they needed to have a certain percentage of homes under contract and a timeline of about a year to complete the acquisition. They also sought to have one simultaneous closing to limit the degree to which homeowners would compare sale prices. By early 2020, ML Realty had two-thirds of the homes under contract.
In March 2020, the two development companies discovered that each owned houses in the neighborhood and were reaching out to homeowners. This presented a dilemma on how to move forward. ML Realty and Prologis decided to work together for a win-win solution. They came to an agreement in which they would collaborate to acquire the remaining homes and then split the site 50/50.
After much negotiation with the remaining homeowners, the two companies were able to acquire the entire site with all home sales closing on the same day. ML Realty conducted the horizontal development of the property and then each company handled their own ground-up construction on their respective industrial parks. They agreed to split the costs of any soil remediation issues that arose anywhere on the site. Each built two warehouses on their share of the property ranging from 295,000 to 364,000 square feet, all with 40-foot clear heights. When it came to leasing, the companies made an effort to reduce competition by designing the buildings to have different features. Additionally, ML Realty pursued spec tenants while Prologis planned for build-to-suit tenants. The four buildings are currently under construction and pre-leased.
The presenters credited their success to several factors. First, the onset of the COVID-19 pandemic in 2020 created an uncertain economic environment in which many of the homeowners were more open to selling, especially since on average, they were offered double the value of their homes.
Also, because the neighborhood was already surrounded by industrial properties, there were no adjacent residents or landowners in opposition to the development. The cooperation of the two companies was facilitated by the fact that Tim Geisler of ML Realty Partners had long-standing personal relationships with several employees at Prologis and he was able to reach out to those contacts to establish initial discussions of collaboration.
Finally, the developers say they were lucky that no other firms bought homes in the neighborhood during the early stages of their acquisition efforts, as that would have caused additional complications.
This post is brought to you by JLL, the social media and conference blog sponsor of NAIOP’s CRE.Converge 2022. Learn more about JLL at www.us.jll.com or www.jll.ca.
Diana Schapiro is NAIOP’s Senior Manager of E-Learning, focusing on e-learning courses and certificate programs development and management.