Seeing potential and transforming spaces for sound investments
One of the most challenging parts of acquiring a new property is having the vision for what it could become. For example, when purchasing a single-family home, it’s easier to envision repairs to a bathroom or kitchen, but in more complex real estate transactions, such as the purchase of a multifamily property, these repairs can seem burdensome and costly. However, what many do not consider is how real estate repositioning—the strategic use of renovations and improvements—can enhance value and maximize profits.
In basic terms, real estate repositioning involves significant renovations to create a new use for an existing building or site. Common examples of property repositioning include turning manufacturing space into offices or the transition of creative workspaces into loft apartments. The goal of repositioning is to derive more value from the property’s new use, either through higher rents or a higher sale value. Typically, as the function of the building changes, the quality of the space will improve as well. The benefit of repositioning is that a building’s value can increase significantly in a shorter period of time than if the owner were to wait for market appreciation. This comes in part from the fact that all property types are viewed separately by investors, and the different rates of return required for each asset class impacts property valuations.
Location and local market conditions will often determine the best use for a property. One way to figure out a property’s best use is to conduct a market study that examines the local stock to determine current supply, planned supply, absorption rates, vacancy rates, and rental trends. Reports are useful, but they don’t always paint the whole picture. Anticipating which sectors in a market will have the greatest demand presently or in the future is one of the major keys to success. Once the owner has determined the best use for a property, it is extremely important to determine the costs to transform the space, ensuring that it does not exceed intended take-home profits.
Repositioning comes down to understanding the most efficient way to legally use land. In submarkets throughout the Westside region of Los Angeles—where there is virtually no vacant land —to create value, owners must have a vision of what could be, not what currently is. Having a nizche geographic focus is one way to simplify the process as you will become an expert in that market, understanding the supply and demand factors. Creating longstanding relationships with local municipalities also helps achieve success in repositioning projects.
Christina, an LA-based vertically integrated real estate sponsor and manager, which has created a programmatic series of private equity companies known as Christina Real Estate Investors.
(“CREI”), often explores the repositioning of its real estate assets. Recently, the company acquired two well-located retail properties on a prominent block in Beverly Hills. Upon examination, it was determined that the best use was office space—the area has stagnating office supply and the opportunity to convert these properties was appealing given their proximity to desirable dining and retail. Beyond the location, it was important to recognize the changing landscape of the retail market, and the need for boutique office space in a post-COVID era. Tying the two lots together to create a garden style, open-air property, has not only optimized the building’s value by creating a campus-like atmosphere, but has allowed for more profitability. Ultimately, knowing zoning requirements inside and out afforded the company knowledge of all options for its property, allowing for transformation of this project. This is in line with a “multiple exit strategies” approach in which having more than one path to asset monetization lowers the downside risk.
Property repositioning can be an effective way to maximize profits, but one major factor that anyone interested in repositioning should consider is zoning, which can be the sole factor that makes or breaks a project. Government approval is always required when making major renovations or improvements to a building. During the acquisition process, it is critical to understand what is allowed under existing zoning laws, also known as a by-right development, or the uses that are permitted without receiving law-bending rules. In other cases where the building intent is not “by-right,” you will need to obtain a variance, which grants approval to build and operate improvements that would normally be prohibited under current zoning laws. Obtaining a variance may be the most effective way to reposition an investment for maximum profit, and while they can be difficult to achieve, they are often worth the effort.
Lawrence N. Taylor is the Founder and President of Christina and is responsible for vision, strategy, and leadership. With over 40 years of experience, he is a seasoned investor with a core focus on the Westside region of Los Angeles. He has played an instrumental role in notable projects across LA including the introduction of a high-rise residential development in North Century City, the development of the Montana Avenue Shopping District in Santa Monica, the revitalization of the South Beverly Hills Retail Shopping District, and the re-development of Westwood Village. He received his Bachelor of Science degree from the University of Southern California.