Completed in spring 2015, Chophouse Row is a 44,000-square-foot (4,000 sq m) mixed-use project in the Pike-Pine neighborhood of Seattle, less than one mile (1.6 km) from downtown, that combines loft office space, retail space, and three apartments. The development combines a circa-1924 industrial building with a new seven-story office tower, a through-block pedestrian alley/mews, and a midblock courtyard that links Chophouse Row with the developer’s other properties on the block, collectively known as 12th Avenue Marketplace.
Development Finance
The developer was Dunn + Hobbes, a Seattle-based firm focused on small-scale infill projects in urban village neighborhoods. Developing Chophouse Row required $4 million of equity and $12.4 million of debt, plus $750,000 for closing costs and working capital. The project financing involved the recapitalization of the entire 12th Avenue Marketplace. Dunn + Hobbes provided 51 percent of the equity, and a Heartland Investor Opportunities fund provided the remaining 49 percent.
There are about 45 investors in the 12th Avenue Marketplace deal, each of whom has invested $50,000 to $200,000 through a preferred equity stake. The leveraged ten-year internal rate of return for the investors, originally projected to be 13 percent, was 11 to 12 percent as of early 2017 due to construction cost overruns.
Planning and Design
Liz Dunn, who founded the development firm in 1997, says she has “always been a fan of what I call skinny infill development—filling in the missing teeth on a block rather than demolishing it. My entire business is defined by rehab paired with skinny infill, and Chophouse Row is an example of both.”
Principal objectives of the plan were to preserve and adapt the two-story existing building, and to provide attractive pedestrian spaces within the project. To accomplish this, one of the existing structure’s three bays became an open-air pedestrian alley providing access to the midblock courtyard and creating 160 feet (49 m) of retail frontage. Since then, Dunn has begun converting the backs of other buildings along the courtyard to provide retail space. The scale of the mews, its textured frame of exposed structural elements, its lighting, and the small tenants alongside it all invite visitors to explore the spaces beyond.
Tenants and Leasing
All of the commercial spaces were leased before construction was completed. The offices achieved a new benchmark for market rents in the Capitol Hill neighborhood, with rents in the $24 to $28 range. The retail space attracted restaurateurs and innovative retail entrepreneurs, with rents in the $36-per-square-foot ($388 per sq m) range. The residential penthouses were rented within three months, with typical rents of $3.69 per square foot ($39.72 per sq m).
“I spend a lot of my time . . . searching for the tenants I want, determining which is going to be the best fit,” says Dunn. “I like to get a feel for who the tenant is.” Small tenants are a big part of the plan, and often pay higher per-square-foot rents. “What a tenant starting a small business probably cares most about is their total monthly rent bill, not what rate they are paying on a per-square-foot basis,” she notes.
Observations and Lessons Learned
Heartland believes there are many small investors looking for investment opportunities like this one, but that it takes more work and time to arrange this type of financing than it does to arrange financing with one large institutional investor. There are benefits, however, in that the developer can exercise more control when working with small investors than when working with large institutional investors.
Incremental infill development can take extra time and effort, and it requires a dedicated developer that is committed to staying with the project over an extended period. While some developers might have tried to remove the old buildings on the site and build new ones in one big phase, a more granular approach can be rewarding. There are easier and perhaps more profitable ways to go about developing a site like this, but those likely would not have resulted in the same level of richness of the environment that has been created.
Dean Schwanke is ULI senior vice president of case studies and publications.
Read the full ULI Case Study: Chophouse Row | More ULI Case Studies
Project Information
| Development timeline | |
|---|---|
| Site purchased | 1999 |
| Design planning started | March 2012 |
| Entitlements received | September 2013 |
| Construction financing arranged | October 2013 |
| Construction started | October 2013 |
| Sales/leasing started | January 2014 |
| Project opened/completed | May 2015 |
| Building area by use | Gross building area (sq ft) | Net building area (sq ft) |
|---|---|---|
| Office | 25,317 | 21,080 |
| Retail/restaurant | 6,379 | 5,328 |
| Residential | 4,795 | 3,901 |
| Storage | 1,218 | |
| Parking | 5,834 | |
| Total GBA | 43,543 | |
| Adjacent courtyard retail addition | 3,005 sq ft | |
| Parking spaces | 12 |
| Land use plan | Site area (sq ft) | % of site |
|---|---|---|
| Buildings | 6,500 | 65% |
| Open space/landscaping | 3,500 | 35% |
| Total site area | 10,000 | 100% |
| Residential information | |
|---|---|
| Number of units | 3 |
| Unit size | 1,300 sq ft |
| Percentage leased | 100% |
| Typical rent per month | $4,800 |
| Typical rent per sq ft | $3.69 |
| Office information | |
|---|---|
| Office gross area | 25,317 sq ft |
| Office net rentable area | 21,080 sq ft |
| Typical floor size | 6,375 sq ft |
| Percentage of net rentable area leased | 100% |
| Number of tenants | 7 |
| Annual rent per sq ft per year | $24 - $28 |
| Average length of lease | 5 years |
| Major office tenants | Tenant type |
|---|---|
| Tectonic | Design firm |
| Mazlo | Mobile technology |
| Glympse | Mobile technology |
| Cloud Room | Coworking space/social club |
| Retail/restaurant information | |
|---|---|
| Retail space (gross) | 6,379 sq ft |
| Retail space (net) | 5,328 sq ft |
| Retail tenants | 8 |
| Percentage of retail leased | 100 |
| Annual rent range | $34 - $37 per sq ft |
| Key retail/restaurant tenants | Tenant type |
|---|---|
| Amandine | Bakery |
| Empire Espresso | Coffee shop |
| Marmite | Restaurant |
| NICHEoutside | Garden and housewares shop |
| Kurt Farm Shop | Ice cream and cheese |
| Upper Bar Ferdinand | Restaurant |
| Play on the Hill* | Doggie daycare and retail shop |
| Honed | Jewelry boutique |
| Sundry | Juice bar and bodega |
| * This tenant is in the Manhattan Building and not part of the square footage total for Chophouse Row. However, the construction cost for this space is included in the construction budget. | |
| Chophouse Row development cost information | |
|---|---|
| Site value (2016) | $2,367,500 |
| Site acquisition cost (1999)* | $900,000 |
| Hard costs | |
| Core and shell (main building) | $8,811,184 |
| Core and shell (adjacent doggie daycare) | $310,129 |
| Office tenant improvements | $752,000 |
| Retail tenant improvements | $294,000 |
| Residential upgrades | $145,000 |
| Sales tax | $947,000 |
| Total | $11,259,313 |
| Soft costs | |
| Architecture and engineering | $986,383 |
| Finance and legal | $219,995 |
| Insurance | $41,521 |
| Permits | $89,000 |
| Leasing and marketing | $103,000 |
| Developer’s fee | $550,000 |
| Interest reserve | $397,892 |
| Signage, utilities, landscaping, other | $389,691 |
| Total | $2,777,482 |
| Total development cost without land | $14,036,795 |
| Total develoment costs with land value | $16,404,295 |
| Hard costs per sq ft** | $259 |
| Total development costs per sq ft** | $322 |
| *Site was part of a larger acquisition, so figure is approximate. **Excluding land costs. | |
| Project Capitalization: Existing operating assets | |
|---|---|
| Agnes/Piston & Ring | |
| Value | $16,903,235 |
| Less debt | -$10,950,000 |
| Net equity required | $5,953,235 |
| Pacific Supply/Manhattan (PacMan) | |
| Value | $4,023,857 |
| Less debt | -$2,800,000 |
| Net equity required | $1,223,857 |
| Total operating equity | $7,177,092 |
| Project Capitalization: New development | Pro forma | Actual (revised post-construction) | Notes |
|---|---|---|---|
| Total new development costs | $14,366,914 | $16,402,293 | Costs increased during construction due to delays and unprecedented inflation in construction market. |
| Less construction loan | -$10,700,000 | -$12,370,000 | Loan increased during construction as rent deals consistently exceeded pro forma. |
| Net equity required | $3,666,914 | $4,032,293 | |
| Closing expenses/working capital | |||
| Legal and organizational costs | $215,000 | ||
| Loan closing fees | $230,927 | ||
| Platform working capital | $200,000 | ||
| Total | $645,927 | $752,830 | Per 2014 deal closing (higher than projected in prospectus) |
| Total development equity | $4,312,841 | $4,785,123 | |
| Sources of capital | Pro forma | Actual | Notes |
|---|---|---|---|
| Equity sources | |||
| Urban Shelter LLC (sponsor) | $5,859,865 (51%) | $6,278,880 (52.5%) | Sponsor put in extra equity to cover construction cost overruns not covered by increased debt. |
| HIO 12th Avenue Investors LLC | $5,630,067 (49%) | $5,683,333 (47.5%) | Per 2014 deal closing (slightly higher than projected in prospectus) |
| Total equity | $11,489,932 | $11,962,213 | |
| Debt sources | |||
| Agnes Piston loan - Cashmere Valley Bank | $10,950,000 | $10,950,000 | 10-year permanent, 3.5% |
| Pacific Chophouse construction loan - HomeStreet Bank | $13,500,000 | $15,170,000 | Construction loan, LIBOR + 3%, including $2.8 million of debt for Pacific Supply Building |
| Total debt | $24,450,000 | $26,120,000 | |
| Total equity and debt capital | $35,939,932 | $38,082,213 | |
| 12th Avenue Marketplace Project Performance | Projected | Actual | Notes |
|---|---|---|---|
| Project level | |||
| Leveraged 10-year IRR | 15% | 13.25% - 14% | |
| Cash flow year 1 (under construction) | $470,504 | $624,570 | 2014; permanent financing payments delayed |
| Cash flow year 2 (lease-up) | $1,232,670 | $447,902 | 2015; permanent financing payments kicked in |
| Cash flow years 3 - 7 (stabilized) | $1,062,391 | $900,000 - $950,000 | 2016 - 2020 average expected |
| Cash flow years 8 - 12 (stabilized) | $1,456,584 | $1,350,000 - $1,400,000 | 2021 - 2025 average expected |
| Investor equity | |||
| Leveraged 10-year IRR | 13% | 11% - 12% | |
| Priority preferred return | 10% | (per annum, compounded at the end of each calendar year) | |
| Sponsor equity | |||
| Leveraged 10-year IRR | 16.50% | 13.5% - 15% | |
| Promote | 60% | 60% | |
