Key Notes-LAI Phoenix Chapter & REIAC Joint Presentation
John Graham, Sunbelt Holdings and Dr. Morgan Olsen, Arizona State University
How does the largest single tenant office project in the history of the great State of Arizona get done?
According to John Graham, the President and CEO of Sunbelt Holdings, its germination started in a Starbucks while he was buying his usual morning Cup of Joe. On November 15, 2013 over breakfast, John Graham and Dr. Morgan Olsen jointly presented the details for both the Marina Heights office project as well as ASU’s expansion of its sporting facilities “District” at the Phoenix Country Club. The presentation, made to a packed room of over 100 attendees, was itself a joint venture program of the LAI Phoenix Chapter and REIAC communities.
John Graham kicked off the presentation by detailing how his morning Starbucks ritual finally paid off big. Mr. Graham, a cautious yet visionary Stanford grad, is a belt and suspenders type of guy. He came prepared with a super high-tech PowerPoint presentation, but brought a large story board with mounted project exhibits “just in case” his technology failed him. Mr. Graham articulated some of the major highlights that are related to the project such as its history, timeline, financial structure, as well as design concepts.
Some of the highlights presented were about Sunbelt’s acquisition of the land from joint venture partner Suncor Development after the last cycle. In fact, a State Farm representative serendipitously inquired into the vacant parcel along the shores of the Tempe Town Lake when en-route late one afternoon while visiting Phoenix. The project, over time will exceed two million square foot (S.F.) of office including 40,000 S.F. of retail. The retail component will service the State Farm campus employee’s needs for restaurants and convenience items. According to Graham, this is a very aggressive time table which begins with the first building being delivered in Q4 of 2015 and the final stages to be completed by Q3 of 2017.
The financial structure is complex in nature, but appears to be “Win-Win” as the deal is a joint venture (JV) of Sunbelt Holdings, Ryan Companies, and State Farm. State Farm is the sole tenant as well as the financier of the project. The deal has several moving parts that begin with the sale of the 10.623 acre Sunbelt Holdings site to ABOR (ASU). ABOR then did a 99 year pre-paid ground lease to S/R Marina Heights, LLC, a JV entity that is owned by Sunbelt, Ryan and State Farm. The effective price of the proceeds from the ground lease transaction is ± $31 million which represents a land value of $35 P.S.F. S/R Marina Heights, LLC then assigned its interest in the ground lease to SFSR Marina Heights, LLC. State Farm will lease all of the office space (1,929,127 S.F.) from SFSR Marina. In one last twist, S/R Marina Heights will lease the retail component and then sublease it to retailers. A member of the audience commented that, “The attorneys on this deal must be very happy with themselves and their fees.”
Critical deal components that made the deal very enticing to State Farm are the relationship and proximity to the vibrancy of the neighboring ASU campus. The insurance company views the young student population as an able and educated pool of current and future employee pool. Additionally, the quality of the urban investment grade trophy site that has great access to transit and downtown amenities further enticed State Farm to pull the trigger. This deal is tantamount to throwing a very large boulder into the Tempe Town Lake as it will have a vast ripple effect on the local economy. The project, including the TI’s and land, is estimated at a total cost exceeding $600 million. This economic activity coupled with the roughly 8,000 jobs slated to be associated with the campus will be a huge factor in the Phoenix marketplace recovery.
Dr. Olsen then presented ASU’s vision of their sporting facility district which he fondly referred to as “The District” and borders the Sunbelt/State Farm Marina Heights Project. The district is a master plan that ASU has developed to enhance and re-develop the area north of the main campus that borders the downtown Tempe district to the west. At the confluence of the three areas of Downtown, the main ASU Campus, and the Sports District is “USA Place”. This is slated to be a large Omni Hotel and conference center. Ground Zero for the hotel will be the southwest corner of University Drive and Mill Ave. The hotel is slated to have 330 rooms, a 500 door multifamily component as well as 20,000 S.F. of retail and a 50,000 S.F. event center. Lastly, Sun Devil Stadium is slated for an expansion and renovation to keep it competitive in its Division 1 league.
Dr. Olsen had this to say about the economic activity taking place around the ASU campus, “We are truly pleased that a Fortune 50 company like State Farm chose to locate its super-regional hub in Tempe on ASU land along the Town Lake. We look forward to partnering with State Farm in a broad range of ways as they build their employment base here. The presence of State Farm adjacent to the ASU Athletic Facilities District will lend enhanced momentum to its development over the next few years.”
One can only surmise that with all the real estate related development activity going on surrounding Tempe and the ASU campus, happier times are bound to follow for Valley residents. Of note was a parallel meeting taking place next door to the LAI event. The meeting sponsored by Valley Partnership had over 300 attendees learning about development along route 303 on the west side of metro Phoenix. The market has surely turned in Phoenix if over 400 real estate professionals are willing to show up at 7:30 for early morning breakfast events to learn of the details of major projects that will impact the Valley of the Sun for the greater good.
By Ian P. Turner
NAI Horizon-Valuation Services Group
2944 N. 44th Street
602 393 6794