Wednesday, April 17, 2024

Is $68M a fair price for city purchase of Thermo Fisher building? LGC hears city’s pitch

The city met with the LGC Tuesday to present its plans for acquiring the Thermo Fisher campus, 12.5 acres in downtown Wilmington. (Port City Daily/Amy Passaretti Willis)

WILMINGTON — As the city works through its due diligence period on the potential purchase of the Thermo Fisher campus downtown, questions on whether its price is fair — especially during a time when analysts are saying the commercial real estate market is declining — are being asked by residents, the Local Government Commission and at least one city council member.

According to an internal email obtained by Port City Daily, Luke Waddell has asked to consider a different offer.

READ MORE: $3M annually to operate Thermo Fisher building, council debates what floors to occupy

“Luke wants to renegotiate the price!” Charlie Rivenbark wrote April 25 to Paul Loukas, partner and broker-in-charge with Cape Fear Commercial, the firm behind the sale.

“At $68 million, the city is purchasing this opportunity at a steep discount and an incredible value to the city and community,” Loukas told PCD. 

Waddell, CEO for Cadence Realty Corp, wouldn’t comment further to Port City Daily why he wanted to consult the price.

However, at the Local Government Commission meeting on Tuesday, Waddell told the LGC board: “I’m the fiscal hawk on our council. … It was important for me to attend because I’ve examined this acquisition skeptically and pain-stakingly. And I’ve come to the conclusion, as I’m sure you will, this is a once-in-a-generation opportunity.”

Waddell was the only council member present, aside from Mayor Bill Saffo, as City of Wilmington staff presented its plans in a nearly two-hour discussion. Saffo told the LGC, the bipartisan city council — three Republicans and three Democrats — is “unanimously behind the decision.”

The LGC guides governments in fiscal management and will vote on whether the city can move forward in the purchase.

The buy will include the fully furnished 12-story building on a 12.5-acre campus, which includes two parcels flanking either side of the property, as well as 1,500 parking spaces between a deck and lot under the building.

When Thermo Fisher’s properties first went on the market in spring 2022, four months after the company purchased PPD, city manager Tony Caudle said he consulted finance director Jennifer Maready. Caudle asked if the city could afford the just over $100 million tax value at the time, as a “hypothetical number,” to which Maready answered “no.”

LGC board member Paul Butler asked if the Economic Development Partnership of North Carolina — charged with recruiting industry to the state — was aware of the available building or if it was ever listed with the state.

“The regional economic development arm, representing New Hanover and Pender counties, were aware of the availability of office space and actively marketing it,” Caudle responded.

The city first made an offer for $60 million but never received a response from Thermo Fisher, according to deputy city manager Chad McEwen.

When State Treasurer Dale Folwell, the chair of the LGC and who is running for governor in 2024, asked if other parties had been interested, McEwen indicated offers were likely in the $50-million range. However, “to his knowledge,” none interested the broker.

The city came back with a second bid for $68 million, this time to include furnishings, and entered its purchase contract with Cape Fear Commercial in February.

Maready told the LGC she initially anticipated a 3-cent tax rate increase to help finance the offer, but after receiving a projected tax revenue coming to the city in fiscal year 2024, at $21.8 million, she adjusted it to 2.5 cents.  

However, within a month of entering the purchase agreement, that estimated assessed value increased to $22.4 million, reducing the tax rate to 1.5 cents. 

Final estimated assessments were valued at $22.6 million by the end of April. Maready said the city could allocate more of its taxes to debt service, 8.25 cents of the city’s 39.5 cents. It would allow for a one-time $8.5-million transfer to debt service and reduce the need for a tax hike (typically, the city allocates 7.13 cents to debt service).

Folwell asked if there was any public opposition to the sale, which Caudle said only related to the tax increase. 

“I don’t know if there’s any opposition once the tax increase was taken out,” he said.

ALSO: Residents speak out against $70M financing council approved for Thermo Fisher campus

The city has been looking to consolidate its offices into one space for years, as departments are spread out currently in multiple locations. Many are located in aging buildings that need upkeep, including at 305, 340 and 414 Chestnut, 115 North Third, 1502 Wellington, 302 Willard and 1702 Burnett Blvd. 

Caudle explained to the LGC Tuesday every space needs assessment done over the last 30 years has indicated the city would have to infuse millions of dollars to renovate its many properties. The 2022 space needs assessment determined it would cost $90 to $96 million to raze and rebuild 305 Chestnut St., the city’s administrative office. 

It would consist of 102,000 square feet and a 237-space parking deck. A much higher value, Caudle noted, than the $68 million offer for the Thermo Fisher property overlooking the Cape Fear River.

The city most recently purchased the Harrelson Building, 115 N. Third St., to assist with its space needs. Caudle said the idea was to have a building to move staff to temporarily if and when 305 Chestnut St. had to be razed and rebuilt.

Currently, the city occupies about one-third of the Harrelson building and leases out the remainder to companies at a rate of $25 to $28 per square foot. 

State auditor Beth Wood, who sits on the LGC board, asked if the city’s space needs had gone up or down from its 2014 to 2022 assessment. She was stunned when Caudle said it had increased.

“I’m shocked they didn’t go down given the work environments now,” she said. “All your staff are coming in every day?”

According to Caudle, 90% of city employees work in the office, while the other 10% are on a hybrid model, working from home on certain days.

Analysts at Morgan Stanley reported earlier this month the commercial real estate sector has faced challenges since the pandemic forced employees to work remotely, with some businesses shuttering and in effect leaving office buildings empty. The financial advisors are predicting more than half of commercial mortgages will need to be renegotiated in the next two years, during a time when lending rates are steadily rising.

“We’re seeing unbelievable declines in commercial real estate values, and explosive spreads as far as interest rates to financial loans, and a balloon situation,” Folwell said. 

He shared an example of some buildings on the market for $300 million are now selling for $60 million.

“Are you saying everything I described is not present in downtown Wilmington?” Folwell asked.

Caudle said he would not disagree “without more research,” but noted the market downtown is stronger than outlying areas.

He also noted vacancy rates in Wilmington remain extremely low, citywide.

Tracking fourth in the country for its low commercial vacancies, Wilmington’s rate is 2%, UNCW associate professor of economics Mouhcine Guettabi told PCD last week. That’s almost 12 times less than larger metropolitan areas, such as Houston, San Francisco, D.C. and Chicago, where vacancy rates have exceeded 15%, with tech the most significant industry impacted.

Even pre-pandemic, Wilmington reported only 3% empty buildings, while larger North Carolina cities like Charlotte and Raleigh were 7% and above, according to the National Realtors Association.

“It’s potentially a function of the types of businesses and the size of Wilmington,” Guettabi said. “[T]he area has experienced a significant population growth and demand for all sorts of office and residential space.”

However, Wilmington employees are only spending 11% less time in offices than pre-pandemic levels, according to North Carolina’s mobility reports from Google — a trend that started during Covid-19 to track people’s movements to various places, such as work, grocery stores and entertainment.

“It’s a little surprising but much better than other bigger markets,” Guettabi added.

The city is paying $170 per square foot for Thermo Fisher, according to Loukas, who said Class A office space in the region has been trading “significantly higher.” He also said to rebuild a Thermo Fisher-like structure would cost at least $150 million.

During the LGC meeting, McEwen shared numbers of the square-footage price tracking between $183 and $194, based on average sale prices in the city.

A facility condition assessment analysis noted it would cost $251 million to reconstruct the Thermo Fisher tower exactly as is, McEwen stated.

“To find a building comparable to that size, you would need to go to Greenville, S.C., Charlotte, Raleigh,” John Hinnant, vice president and broker of East Carolinas Commercial Real Estate, told Port City Daily last week. 

Hinnant is not involved in the acquisition but simply offered insight as an outside commercial agent, when PCD reached out last week about sales of comparable properties to the Thermo Fisher building.

“But then you have to weigh in various aspects, like water view, proximity to retail, services, etc.,” Hinnant added.

Two weeks ago, vacant property at 101 N. Front St. sold for $6 million or $204 per square foot. The closest building in size — about half of Thermo Fisher’s space — would be Live Oak Bank’s acquisition of the Verizon campus at 3601 Converse Road in February 2022. Live Oak purchased the 162,023 square foot building, built in 2004, for $18.3 million, or $113 per square foot.

Caudle told the LGC on Tuesday, the cost to build a new building for the city as based on the 2022 space needs assessment and April 2023 facility replacement, would be between $627 per square foot and $866 per square foot. 

Folwell inquired as to whether the city considered other options, such as purchasing the Bank of America building at 319 N. Third St. Caudle confirmed as much but explained the owner wanted to do a property swap that did not benefit the city.

“I don’t remember the details, but it had us paying an inflated rate for his building and him paying a lesser rate for ours,” Caudle said. “It didn’t pencil out to make a good decision.”

The 52,000-square-foot Bank of America building sold recently to New Hanover County for $11.4 million, which is $206 per square foot. It will be used by Cape Fear Community College for its expanded nursing and health care programs.

The city plans to surplus seven of its currently occupied properties to help offset debt financing of Thermo Fisher. Located in Wilmington’s downtown hub, the city will occupy five floors and rent the rest out at market value.

McEwen told the LGC the sales could bring in $19 million in potential revenue.

The city also plans to sell Thermo Fisher’s adjacent 3.4- and 3.3-acre tracts to go toward the debt on the building purchase, according to Caudle.

When Folwell asked whether the city considered entering a public-private partnership (P3) for its development, Caudle said staff’s recommendation is an outright sale.

“The reason being, my experience with P3s, private developers prefer deals where they think they can save money and do it on an acquisition price and the city does not get the full value until later as a result of tax implications and growth,” he explained.

The city would also not have any use for the tracts, Caudle added, though they are appraised by Colliers International at $10.6 million and $11.1 million. He indicated one, on the northwest side of the building, might be ideal for a hotel, an industry lacking in the downtown area.

Folwell inquired as to whether there are any floodplain issues with the tracts that might prohibit development, but a phase one environmental assessment came back clear. The land is under a brownfields agreement as it was a working waterfront for the shipping industry 80 years ago.

While the city will only take up five floors of the building, plans include bringing in additional revenue from leasing out between 40% and 50% of the building to other tenants at market rate. The roughly 120,000 square feet of unused space could generate $3.8 to $4 million annually in revenue for the city.

“We believe it’s a hot market,” Caudle said. “But I don’t want to confuse the acquisition of the building with economic development. We’ve had multiple inquiries regarding use of vacant space but have yet to enter into serious negotiations with anyone.”

McEwen told council at a March 31 budget session, market rate is about $32 to $35 per square foot, which would be used to rent the remaining 46% of the building to other companies (at least 20 have shown interest). 

“Keep in mind, the price-per-square footage does not give any consideration of the furnishings, technology, security, parking deck,” Hinnant said. “There’s a lot of added value in the city’s acquisition.”

The parking deck coming with the building is an example; it also could benefit the public. A December 2020 parking assessment done by Kimley Horn reported an unmet demand for 1,050 spaces during events hosted at Live Oak Bank Pavilion, a block away.

According to McEwen, when he asked the company to update the study following the Thermo Fisher offer, it indicated there is still a void in parking-space needs. The city would utilize spaces during the workday for employees of the building, but plan to open the lot to the public after hours and on weekends, potentially charging $15 to $20 per person during an event.

During the LGC meeting, McEwen estimated building a new deck would cost $25,000 per space, or $26 million for the 1,000-space size at Thermo Fisher, which is appraised at $26.6 million.

The Thermo Fisher office building will cost the city roughly $3 million to maintain, which Caudle said Thursday “might be” more expensive than maintenance on the seven buildings it would offload.

“We’ve not taken good care of our facilities,” he admitted. “We would treat this building with a different level of experience.”

According to a Colliers International assessment conducted in February, the appraised value of the 12.5-acre property is $111.3 million. It breaks down:

  • Office building — 4.1 acres, appraised at $63 million (land only: $13.3M and improvements value: $48.7M)
  • Parking deck — 1.7 acres, appraised at $26.6 million (land only: $5.6M and improvements value: $21M)
  • Vacant development tract A — 3.3 acres, appraised at $10.6 million 
  • Vacant development tract B — 3.4 acres, appraised at $11.1 million 

Meanwhile, the tax assessed value for the 12.5-acre property is $91.5 million.

“It really drives home, whatever metrics you use, $68 million is far below any of those,” McEwen said.

Still Wood asked why there was such a gap in the offer price versus the tax assessed value.

“What’s wrong with it?” she said.

McEwen said the facility assessment revealed the 18-year old building is in good shape  and well maintained.

On April 20, the city released a request for proposals for commercial real-estate leasing services to help manage office space within the building. Bids are due May 4 to assist the city with preparing market-rate analyses, negotiating terms and facilitating rent collections.

The city anticipates an LGC vote at its June 6 meeting, about a week before its $500,000 refundable deposit goes hard. On June 11, the city owes another nonrefundable $300,000 to keep the deal before its July 31 firm closing deadline.

“We have the opportunity to show a model system at work with a local government that is fiscally responsible, financially resilient, making good, sound business decisions for taxpayers and respecting the checks and balances of the LGC process,” Mayor Saffo said to the LGC board.

[Ed. note: Council member Charlie Rivenbark is a senior vice president with the Cape Fear Commercial and voted on approving the financing structure for the potential Thermo Fisher acquisition. Port City Daily asked Rivenbark if he plans to recuse himself from the final vote about moving forward with the property purchase; he did not respond.]

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