Hot market prompts Gilbane to sell One Financial Plaza while investing in RISD housing
When Gilbane Properties paid $48 million in cash for two buildings in Providence’s Financial District – one of them the landmark One Financial Plaza – company executives were thinking long-term.
Rhode Island's Market Has Changed. Developers, Builders, Investors and Sellers Must Change With It.
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However, the “time to harvest” the investment, said president Robert Gilbane, came sooner than expected – just 20 months later.
For $46 million, Gilbane parted with One Financial Plaza, selling it at the peak of a hot real estate market to two Connecticut-based companies. For Gilbane, the deal was sweet; the company quietly walked away almost breaking even on the deal by selling one building and kept the smaller 15 Westminster.
The property at 15 Westminster St. will be a long-term revenue stream once Gilbane finishes transforming it into apartments for Rhode Island School of Design students.
According to the Providence tax assessor’s office, the 12-story building is valued at $17.6 million, which could easily be eclipsed once the renovation is completed.
“Just from a price standpoint, it’s probably the biggest deal that’s ever been done, except for the (Providence Place) mall,” said Thomas O. Sweeney, vice president of Rodman Real Estate in Providence. “This is a great deal for the city. It shows that outside investors are willing to make a commitment to a trophy property in the city.”
Gilbane Properties, a subsidiary of holding company Gilbane Inc., purchased both One Financial Plaza and the adjacent 15 Westminster St. from Fleet in May 2003. Earlier this month, after making some improvements to the 28-story office building and securing some major tenants in five- to 10-year leases, Gilbane sold One Financial Plaza to Commonwealth Ventures LLC and GE Asset Management, both based in Connecticut. Gilbane said, “What was an OK investment became a very good investment for us.”
When the company purchased the two buildings, the Providence market wasn’t very hot. Although FleetBank – divesting the property after being acquired by Bank of America – had four or five bidders, there was no frenzy, though the bidding process was lengthy, said Gilbane.
“Actually, (the bank’s) way of doing it was measured and deliberate. It went on for months,” Gilbane said.
“They went through an outside broker, Meredith and Grew, to market the properties and ultimately agreed to do different buyers. They needed to sell these two to a value-added developer – there was no one who’d touch these buildings. You needed to be a cash buyer.”
Gilbane purchased both buildings with cash, which gave the company some flexibility in how they would eventually finance the two – RISD with a lease and some financing on One Financial Plaza that could be easily paid off if the building was sold.
On paper, it looks as if Gilbane Properties did quite well in selling one of its two downtown buildings for nearly the same amount that it paid for both in 2003, but Gilbane said that what his company purchased was initially a real estate nightmare.
Adler Pollock & Sheehan, one of One Financial Plaza’s major tenants, was leaving the building, Fleet now had an uncertain future in Providence real estate, and the office building needed to be “re-tenanted,” Gilbane said.
Also, the smaller building was almost completely empty and its design did not meet modern office standards.
“At One Financial you had some reasonably good tenants there,” Gilbane explained. “Fleet had to sell them together, and they were selling one that was an absolute dog with one that had an income stream, but they were attached. It was Class B space at best.”
Marketing the One Financial Plaza wouldn’t be too successful with a 300,000-square-foot vacant building next door.
Initially, Gilbane once considered luxury condos and office space at 15 Westminster St., but neither the market nor the space would lend themselves to either, he said. There was no parking for an office building, and the city didn’t need more Class B space.
“When we bought it, we had no guarantees that RISD was on the horizon,” Gilbane said. RISD, though, was within view.
When Gilbane put in a bid for the two buildings, the company approached RISD, Gilbane said. RISD already had a connection to the building; a year earlier Fleet gifted the first two floors of 15 Westminster to the school for its library.
RISD had a need for housing and was having difficulties with a proposal to develop housing on top of College Hill. Gilbane spent six months going through the design with RISD for the apartments.
Before a deal with the art school could be struck, there were logistical problems to be solved.
A major concern was that both buildings were “attached at the hip,” Gilbane said. When 15 Westminster St. was built in 1917, it was done without a ventilation system. The building was constructed in an H-shape so that there would be cross-ventilation, Gilbane said.
When One Financial Plaza was built, its utility system served both buildings, connecting the two with an umbilical cord of wiring.
There were other concerns. The 30,000 square feet of land under 15 Westminster was divided – 25,000 square feet was owned by Fleet and 5,000 square feet had a ground lease on it with 12 years remaining, owned by a partnership of 16 individuals, Gilbane said.
The infrastructure and land issue obstacles were solved by the company last year and an agreement was signed with RISD.
Gilbane and RISD entered into a 99-year lease with an option to buy, something that Gilbane said he feels comfortable with, and something that allows RISD the flexibility to devote funding to other initiatives.
“Attached to the agreement is a set of plans and specifications, with the lease begin date, move-in date,” Gilbane said. “RISD has no day-to-day responsibilities; 100 percent of this is on Gilbane’s shoulders. They have an option to (buy).”
As for the marquee One Financial Plaza, it appeared ripe for sale.
With the market nearing its peak, Gilbane said he decided to test the market, and put together an investment package with information on One Financial Plaza. It didn’t take long for a bite. There were 12 interested investors, and the two that Gilbane chose in the end were not the highest bidders.
“I look at what’s the right time to harvest, buy and sell,” Gilbane said. “…Every sign said we were close to a high point in the marketplace, interest rates were starting to trend up, pension funds that had allocated a lot of money to real estate were starting to cut back because the stock market was improving.”
The deal might serve as a bellwether to things to come.
“Major cities have attracted major investors. They’re so pricey now that people are looking for alternatives in secondary cities,” said Charles T. Francis, president and partner of CB Richard Ellis N.E. Partners.
