Mark Hoekstra, managing director, The Heritage Group

The Important Distinction Between Retail and Industrial Automotive Properties

Carrie Rossenfeld Retail

As SoCal Real Estate recently reported, South Bay Autoplex LLC has purchased South County Autoplex, a 62,855-square-foot automotive retail center located at 1403-1427 Broadway in Chula Vista, California, for $10.2 million from Autoplex Broadway LLC, an LLC created by The Heritage Group (THG) for a group of its private investors. Heritage converted South County Autoplex from an industrial auto-repair facility to a high-quality retail auto-service facility in just over two years after purchasing it.

Mark Hoekstra, managing director of THG, spearheaded the operations of the property, and the sale price totaled 176 percent over the original price.

One of the reasons for increased ROI was that THG capitalized on the property’s retail vs. industrial zoning. In retail automotive properties, expectations from customers regarding the look and operation are much higher than in industrial properties, which allowed THG to elevate both of these aspects in its repositioning of South Bay Autoplex. We caught up with Hoekstra to discuss the transaction and the special considerations that need to be kept in mind during auto-related retail transactions.

SoCal Real Estate: What was unique for you about this transaction?
Hoekstra: There were a couple things that really struck a chord. I have had experience dealing with automotive-related properties in my career, and most people’s perception of automotive is that it’s down and dirty and not the most visually pleasing, along with having the potential for environmental-related issues. A lot of investors shy away from automotive because of this.

This particular property stood out. One of the anchor tenants is 4 Wheel Parts, which is owned by a larger corporation that happens to be a tenant of ours in the East Chula Vista in the Eastlake area for almost 15 years, so we knew them very well. I know the people in the real estate department, so I was comfortable at that time with them being the only tenant in the property. Also, I was a customer of theirs in that shopping center – I have an off-road vehicle and have spent a lot of time there having repairs and upgrades done on my Jeep.

When cities and municipalities first put together their general plans, they include automotive into one category — the retail category. What most people think of when they hear that is automotive dealerships; it’s only fitting that they go into retail-zoned property. The difference is when you’re dealing with service and repairs: 75 percent of every dollar spent there is spent on labor, so it doesn’t generate retail sales-tax dollars. Municipalities figured this out and quickly changed their zoning, so car sales go into retail, but automotive repair and services goes into industrial-zoned property. When you can find a property like this in a retail zone or sector on a major retail thoroughfare, it’s a very unique property. It was interesting to us that it was not tucked away into the industrial sector. The property was built in the early ’80s; sometime after it was built, they changed the zoning, but it’s always been a service center.

What are the special considerations that need to be kept in mind during auto-related retail transactions like this one?
When we took over the property, there were some management and leasing issues that needed to be dealt with. We wanted it to look and feel like retail, so for us, that meant doing a couple of things: a cosmetic remodeling of it, but also coming up with a new name, which included a new website and logo for the center. We incorporated that new logo into an overall signage program, so now every tenant there has a super high-quality new sign that has a left-hand-corner logo of the center, giving it more of a retail feel.

We also instituted some management controls. One big challenge with automotive-service centers in retail settings is trying to keep the repair part inside the buildings. You should see no cars with hoods up and work being done in the parking lot because that’s not what you would see in a retail center. We’re working with tenants to understand that and enforcing those rules. It must look and feel like a retail center. That’s what we were able to accomplish over 2.5 years of owning this property.

What else should our readers know about this transaction?
When we took over the project, 4 Wheel Parts was the only national tenant. When we sold the property, 49 percent of the square footage was leased to national tenants with recognizable names: Safelite, Aamco Transmissions, 4 Wheel Parts, and we leased 14,000 square feet to Caliber Collision. If that’s not the largest, then it’s one of the largest automotive body-shop, paint and auto-body repair facilities in the country.

When you’re standing on the street, you see a big, beautiful monument sign with four national tenants. When we bought the property, there was vacancy, and it was not maintained well; it didn’t have a national-tenant feel to it. If the property was located in the industrial sector, I don’t think we would have taken that strategy, but because it’s within a block of major national retailers, we did this.

If you can find an automotive service and repair facility in a retail environment, you have to consider what the amenities are around you. A lot of times, people are dropping off a vehicle and waiting for it to be ready, so they need something to do for that hour or two-hour period. If they’re in an industrial setting, finding a place to eat or shop is often not possible, but in a retail corridor, there are possibilities. Applebee’s is only 30 to 40 yards from us, and Target and other retail shopping establishments are easily accessible.