These Building Owners Survived Losing Their Big Tenant By Going Small

A decade ago, Ronnie Wenzler and three other investors saw opportunity in a nearly derelict, wood-framed building in an older industrial section just outside redeveloping areas of Nashville.

The 40,000-square-foot Sawtooth building they bought had been constructed around 1910 to manufacture cans. By 2009, the building was churning out mattresses when Wenzler’s group decided to convert it into industrial-style office space.

It’s now being reinvented again, offering lessons in how to prepare should a property become empty and pivot when necessary. But perhaps the biggest lesson of all is how taking a risk on a property in a challenging area of town can eventually payoff.

Sawtooth’s owners had a single tenant come then go eight years later, leaving them to figure out what to do next. Rather than rely on a single tenant again, they decided to break the space up for multiple tenants. They ultimately scored one of the city’s latest economic development wins.

Pilot.com, a San Francisco-based startup, recently announced that it would open an account management headquarters in half the space with the promise of eventually growing to 450 employees. The building is now fully leased again.

Landing Pilot.com, however, was the "exact opposite of what we had planned," Wenzler said.

He said they had wanted to get the tenant that filled half the space first, even turning away smaller tenants, before deciding to switch gears and sign small tenants – an advertising firm, a graphic design company and a staffing business.

"It turned out that doing the small deals helped get the big deal," Wenzler said.

That’s a far different approach than what the owners did for their first deal in 2010. The industrial-style office vision enticed Griffin Technology, a maker of smartphone accessories that was looking to consolidate operations in one space.

"They were ripe for a different aesthetic that represented their culture," Wenzler said.

Griffin signed a lease in May 2010, giving the building's owners the backing they needed to secure financing for the big renovation. They delivered the building to Griffin in 2011. The project went on to win design awards.

Then, Griffin struggled a bit. Then, the company was bought. And then it was gone, leaving an empty building more than a year ago.

For a real estate investor, especially a small investor, an empty building can cause a lot of heartburn. A key to reducing that heartburn involves preparation, said Wenzler, who also is a Cushman & Wakefield broker specializing in warehouse properties.

Once a year, the investors would meet with Griffin's management to get a sense of how the company was doing.

"We saw two years out that the tenant may not be that stable and that we would want to have" a year's worth of revenue in reserve, Wenzler said. "If you have a relationship with your tenant, they will talk to you."

So, the owners began to save money rather than make distributions to their partners, building up a cash supply nearly equal to their goal. Then came another windfall. Griffin agreed to pay another year's worth of rent in order to get out of a lease that was supposed to run through 2021.

The cash haul allowed the owner to secure new financing to readapt the building for multiple tenants, buying the company time to land new occupants.

Looking back, Wenzler said he is glad his group took the risk. At the time, adaptive reuse projects were few and far between, and virtually nil in the Wedgewood area just south of downtown Nashville. And, of course, the Great Recession had hit.

But in this case, landing a single big tenant helped make the original deal happen, and now with multiple tenants signed, the financial status of the building looks even stronger. These days, more and more tenants want to be in converted warehouses and funky office space.

Just as they did with the space to attract Griffin, Sawtooth’s owners have been making the newly renovated space attractive for a younger workforce. Wenzler said they are adding a shuffleboard table in the common area as well as putting a lot of art on the walls. An outdoor deck area is getting furniture to give employees there a nice place to hangout.

"With that type of product, the value has skyrocketed," said Barry Smith, president of Nashville real estate firm Eakin Partners.

Location has helped increase value more. Redevelopment of old properties in the Wedgewood area has started to envelop the Sawtooth building.

Nearby, the Tennessee State Fairgrounds is undergoing renovations and plans call for parts of the property to include a mixed-use development with a new soccer stadium will be built for Nashville’s Major League Soccer team.

Wenzler said rents are double what they got when Griffin signed. With multiple tenants now, the building’s rent revenue stream is diversified.

Smith said a single tenant with strong credit can be good for a building, as long as owners know the risk. A big lease will eventually expire, and the tenant can be sold or go out of business.

"It’s putting all your eggs one basket," he said. "That’s great if no one drops the basket."

But if the basket does drop, it is good to be prepared.